Whether your business qualifies for the Qualified Business Income (QBI) deduction depends on several factors, including the type of business, your taxable income, and whether it is a specified service trade or business (SSTB). The QBI deduction is available to individuals, trusts, and estates with income from pass-through entities such as sole proprietorships, partnerships (other than publicly traded partnerships), S corporations, and certain estates and trusts. It is not available for income from C corporations.
Key Qualification Criteria
- Trade or Business Activity: Your activity must qualify as a trade or business under section 162 of the Internal Revenue Code. This means your primary purpose must be for income or profit, and you must be involved in the activity with continuity and regularity.
- Exclusions: Corporations and employee services are never qualified trades or businesses. Additionally, SSTBs (such as law, accounting, financial services, health, and consulting) are not qualified if your taxable income exceeds the threshold amount (which is subject to annual inflation adjustments).
- Pass-Through Entities: If you own an interest in a pass-through entity, the trade or business determination is made at the entity level. Material participation under section 469 is not required to qualify for the QBI deduction.
- Rental Real Estate: Ownership and rental of real property may qualify as a trade or business if it meets the section 162 standard. Revenue Procedure 2019-38 provides a safe harbor for rental real estate enterprises to be treated as a trade or business for QBI purposes.
- Rental to Commonly Controlled Business: Rental or licensing of property to a commonly controlled trade or business operated by an individual or pass-through entity is considered a trade or business under section 199A.
QBI Deduction Limitations
- Income Threshold: The QBI deduction is limited to 20% of your taxable income (before the QBI deduction) minus net capital gain (increased by any qualified dividends). If your taxable income exceeds the threshold, additional limitations apply based on W-2 wages and unadjusted basis immediately after acquisition (UBIA) of qualified property.
- Aggregation Rules: You must combine QBI, W-2 wages, and UBIA for all aggregated trades or businesses when applying the W-2 wages and UBIA limits.
What Is Not Included in QBI
- Wage income (except statutory employees where Form W-2, box 13, is checked)
- Reasonable compensation from an S corporation
- Guaranteed payments
- Payments for services as a partner
- Capital gains or losses
- Dividends and interest not allocable to a trade or business
- Commodities transactions or foreign currency gains/losses
- Qualified REIT dividends and qualified PTP income
Source:
Form 8995 Instructions
Form 8995-A Instructions
Disclaimer: This information is based on IRS guidance for Form 8995 and Form 8995-A. Always verify details with current Federal or State Department of Revenue Forms and Instructions. For complex situations, consult a CPA or tax attorney.