What is qualified business income?

What is Qualified Business Income?

Qualified Business Income (QBI) refers to the net amount of income, gain, deduction, and loss from a qualified trade or business operated by a sole proprietor, partnership, S corporation, or trust. It is primarily used to determine eligibility for the Qualified Business Income Deduction (QBI Deduction), which allows eligible taxpayers to deduct up to 20% of their QBI from their taxable income.

Key Characteristics of Qualified Business Income

• Source of Income: QBI must come from a qualified trade or business. This includes income from sole proprietorships, partnerships, S corporations, and certain trusts.
• Exclusions: QBI does not include certain types of income such as capital gains, dividends, interest, or rental income unless it is part of a qualified real estate business.
• Reporting: QBI is reported on Form 1040, Schedule C (for sole proprietors), Schedule K-1 (for partnerships and S corporations), or other relevant forms depending on the business structure.
• Deduction Limitations: The QBI deduction is subject to limitations based on the taxpayer’s taxable income, the type of business, and whether the business is in a specified service trade or business (SSTB).

How to Calculate QBI Deduction

The QBI deduction is generally calculated as 20% of the taxpayer’s QBI. However, for taxpayers with taxable income above certain thresholds, the deduction may be limited based on the business’s wages and unadjusted basis immediately after acquisition (UBIA) of qualified property.

For more detailed guidance on calculating the QBI deduction, refer to Form 8995 and Form 8995-A, which provide simplified and detailed methods for computing the deduction.

Relevant Tax Forms and Publications

For comprehensive information on qualified business income and the QBI deduction, consult the following IRS resources:

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Disclaimer: Always verify details with official Federal or State Department of Revenue Forms and Instructions.