What Is the Qualified Business Income Deduction?

The Tax Cuts and Jobs Act of 2017 enables pass-through businesses to deduct up to 20% of certain types of income, including QBI.

Tax deductions are important because they can reduce taxable income for small business owners and the self-employed, which can lower the amount they owe in taxes. 

What is the QBI deduction?

The QBI deduction gives some owners of pass-through businesses a deduction worth up to 20% of their share of the company's qualified business income. 

QBI is the net amount of qualified items of income, gain, deduction, and loss from a qualified trade or business.

There are taxable income limits for claiming the full QBI deduction. The 2024 thresholds are $191,950 for single filers and $383,900 for joint filers. Business owners who exceed these limits may still be eligible for a reduced QBI deduction, depending on their business type and wage and property factors.

The 2024 phase-in range for single filers is between $191,951 to $241,950, and the phase-in range for joint filers is $383,901 to $483,900. 

QBI is subject to certain limitations such as:

• The type of trade or business
• W-2 wages
• The unadjusted basis immediately after acquisition (UBIA) of certain property owned by the trade or business
• The patron reduction if the business owner is a patron of an agricultural or horticultural cooperative 

REIT/PTP component

Eligible business owners can also deduct 20% of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income. The REIT/PTP component of the QBI deduction is not subject to W-2 wages or UBIA limitations. However, the amount of PTP income that qualifies for the deduction depends on the PTP’s trade or business type. 

The amount of the QBI deduction is limited to the lesser of either the QBI component plus the REIT/PTP component or 20% of the taxpayer's taxable income minus net capital gains.

What constitutes qualified business income? 

QBI is the net amount of qualifying income, gains, deductions, and losses from qualified trades or businesses, including income from partnerships, S corporations, sole proprietorships, and some trusts.  

QBI can include the following items: 

• The deductible part of self-employment tax
• Unreimbursed partnership expenses
• Business interest expenses
• Self-employed health insurance deduction
• Deductions for contributions to certain retirement plans, such as Simplified Employee Pension (SEP) and Savings Incentive Match Plan for Employees (SIMPLE) IRAs and qualified plan deductions

For example, a freelance writer who makes $50,000 a year and has $20,000 in business expenses would have a net income of $30,000 that would be eligible for the QBI deduction. 

QBI is similar to net income, but does not include the following items:

• Items that aren’t properly includable in taxable income
• Capital gains or losses
• Interest income that isn’t directly related to a trade or business
• Wage income
• Income that isn’t connected to U.S. business operations
• Commodities transactions
• Foreign currency gains or losses
• Specific dividends and payments in lieu of dividends 
• Notional principal contract income, loss, or deductions
• Annuities that aren’t received in connection with the trade or business
• Reasonable compensation from an S corporation
• Guaranteed payments from a partnership
• Payments received by a partner for non-partner services
• Qualified REIT dividends 
• PTP income

For instance, income from a business located outside of the U.S. would not be eligible for the QBI deduction. 

You can get a detailed list of items that are excluded from QBI at the IRS website.

Who can claim the QBI deduction?

The QBI deduction isn't available to all pass-through businesses. It depends on the type of business you're in and the owner's total taxable income for the year. 

The following business types can claim the QBI deduction:

• Sole proprietorships. Many self-employed business owners operate as sole proprietors. A sole proprietorship is not treated as a separate legal entity for tax purposes, meaning that the sole proprietor reports business income on their personal tax return.
• Partnerships. A partnership is a way for two or more people to own a business together. Partnerships don’t qualify for the QBI deduction but are required to provide their partners with the necessary information on an attachment to Schedule K-1. Read the Instructions for Form 1065, U.S. Return of Partnership Income for more information.
• S corporations. S corporations allow profits and some losses to be passed through to the owners’ personal income, helping the entity to avoid the double taxation C corporations are subject to. S corporations aren’t eligible for the QBI deduction but must provide their shareholders with necessary information on an attachment to Schedule K-1. Check Instructions for Form 1120-S, U.S. Income Tax Return for an S Corporation for more information.
• Cooperatives. A cooperative is an entity that is run by the people who benefit from its services. As with partnerships and S corporations, cooperatives themselves aren’t eligible for the QBI deduction but must provide their patrons with the necessary information either via Form 1099-PATR or an attachment. Some agricultural or horticultural cooperatives may qualify for a deduction. Check the Instructions for Form 1120-C, U.S. Income Tax Return for Cooperative Associations for more information. 
• Trusts and estates. The owner of all or part of a trust or estate calculates the QBI deduction for the portion they own as if they had directly received section 199A items. Non-grantor trusts or estates can either claim the QBI deduction or pass the information to their beneficiaries. See Instructions for Form 1041, U.S. Income Tax Return for Estates and Trusts for more information.

Who can not claim the QBI deduction?

If your primary reason for engaging in an activity is to generate income or profit and you are regularly and continuously engaged in the activity, the activity qualifies as a trade or business. 

Domestic trades and businesses that are allowed a deduction for ordinary and necessary business expenses under Section 162 of the Internal Revenue Code are qualified trades and businesses. 

The following are not considered qualified trades or businesses:

• Trades and businesses that are operated by C corporations
• Work done by employees
• High-income specified service trades or businesses (SSTBs)

An SSTB is a trade or business providing services in the following fields (with certain exceptions):

• Health
• Law
• Accounting
• Actuarial science
• Performing arts
• Consulting
• Athletics
• Financial services
• Brokerage services
• Investing and investment management
• Trading
• Dealing securities or partnership interests
• Trades or businesses whose principal asset is the reputation or skill of their employee(s) or owner(s)

If your taxable income is within the phase-in range or at or below the threshold, all or part of your SSTB may be considered a qualified trade or business. 

You can take the QBI deduction regardless of whether you itemize deductions on Schedule A or take the standard deduction. The deduction can be taken for tax years beginning after Dec. 31, 2017, and ending on or before Dec. 31, 2025.

It's best to take a step-by-step approach to figure out whether you can claim the QBI deduction. An accountant can help you determine your eligibility.

How to check if you’re eligible and claim the QBI deduction

Follow these four steps to claim the QBI deduction. 

Step 1: What was your total taxable income for the tax year?

For this step, determine your personal total taxable income for the year—not the business’ income. This might include wages from another job, your spouse’s wages, interest and dividends, capital gains, rental income, and more.

If your 2024 taxable income is less than $191,951 ($383,901 if married filing jointly), you can claim the full 20% QBI deduction by completing Form 8995, Qualified Business Income Deduction Simplified Computation and including it with your individual tax return. The QBI deduction's income limits are adjusted annually for inflation.

If your taxable income is greater than that amount, move on to Step 2.

Step 2: Is your business a specified service trade or business?

An SSTB generally includes any service-based business where the business depends on the reputation or skill of its owners or employees. That broad definition includes medical practices, consulting firms, law firms, accountants, investment managers, financial advisers, professional athletes, performers, and more.

The IRS' Qualified Business Income FAQs provide more details on the kinds of businesses that qualify as an SSTB.

Now, select one of the following three options:

1. Your total taxable income is below $191,951 ($383,901 if married filing jointly). You can claim the full 20% deduction. Complete Form 8995, Qualified Business Income Deduction Simplified Computation, and attach it to your individual tax return.
2. Your total taxable income is between $191,951 and $241,950 ($383,901 to $483,900 if married filing jointly). You can claim the deduction, but it will be limited for SSTBs. Non-SSTBs may also have their deduction limited by the wages/capital limits. 
3. Your business is an SSTB and your total taxable income is $241,950 or more ($483,900 or more if married filing jointly). Your income is too high, and you can't claim the QBI deduction. Non-SSTBs may have the deduction limited by the wages/capital limits.

Step 3: Apply W-2 wages and qualified property limitations

You will need to determine your QBI component to calculate your QBI deduction. The QBI component is typically 20% of your QBI from your domestic trades or businesses.

If your taxable income before the QBI deduction is more than the threshold ($191,950 for single filers, $383,900 if married filing jointly), then the QBI for each of your trades or businesses may be reduced by the greater amount of either: 

• 50% of the W-2 wages paid by the qualified trade or business, or
• 25% of the W-2 wages plus 2.5% of the UBIA of qualified property from the qualified trade or business

Qualified property includes all of the company's tangible property (including real estate) that:

• Is owned by the business as of the end of the tax year
• Was used by the business at any point during the year to produce qualified business income
• Hasn't been fully depreciated as of the end of the tax year

If your taxable income before the QBI deduction is at or below the threshold, then you don’t need to reduce your QBI. If it is above the threshold and within the phase-in range, then the reduction is phased in. If your taxable income exceeds the phase-in range, the full reduction will apply. 

Step 4: Complete the necessary tax forms

Individuals and eligible estates and trusts that have QBI, qualified REIT dividends, or qualified PTP income or loss can use one of the following forms to calculate their QBI deduction:

• Form 8995: This form is for joint filers with 2024 taxable income up to $383,900 or single filers with taxable income up to $191,950 who aren’t patrons in a specified agricultural or horticultural cooperative.
• Form 8995-A: Use this form if your taxable income exceeds the limits for Form 8995 or if you are a patron in a specified agricultural or horticultural cooperative.

Potential pitfalls and considerations

There are a few important factors to be aware of when calculating your QBI deduction: 

• Income criteria. Not all business income qualifies for the QBI deduction. It’s important to understand the criteria you need to meet in order to claim the deduction. 
• Business losses. Losses or deductions from a qualified trade or business that are suspended by other parts of the Internal Revenue Code cannot be included in your QBI. 
• Aggregation rules. Taxpayers with multiple business ventures who meet the IRS’ criteria can aggregate their businesses to calculate their QBI deductions. 
• Changes to legislation. Certain provisions of the Tax Cuts and Jobs Act, including section 199A, are set to expire at the end of 2025.

Find out if the QBI deduction is right for your business

If all of this sounds complicated, it is! The QBI deduction can be a generous tax break for businesses that qualify, but it comes with many complicated rules, definitions, and limitations.

For that reason, if you think you might benefit from claiming the QBI deduction, consider working with a qualified tax professional. Find out whether you’re eligible for the QBI deduction and how the deduction could affect you this tax season by contacting 1-800Accountant.

FAQs

What is considered qualified business income?

QBI is the net amount of qualified items of income, gain, deduction, and loss from a qualified trade or business.

What types of income do not qualify for the QBI deduction?

The following types of income do not qualify for the QBI deduction:

• Items that aren’t properly includable in taxable income
• Capital gains or losses
• Interest income that isn’t directly related to a trade or business
• Wage income
• Income that isn’t connected to U.S. business operations
• Commodities transactions
• Foreign currency gains or losses
• Specific dividends and payments in lieu of dividends 
• Notional principal contract income, loss, or deductions
• Annuities that aren’t received in connection with the trade or business
• Reasonable compensation from an S corporation
• Guaranteed payments from a partnership
• Payments received by a partner for non-partner services
• Qualified REIT dividends 
• PTP income

What are specified service trades or businesses (SSTBs)?

SSTBs are trades or businesses that provide services in the following fields (with some exceptions):

• Accounting
• Actuarial science
• Athletics
• Brokerage services
• Consulting
• Dealing securities or partnership interests
• Financial services
• Health
• Investing and investment management
• Law
• Performing arts
• Trading
• Trades or businesses whose principal asset is the reputation or skill of their employee(s) or owner(s)

What is the difference between net income and qualified business income?

Net income for a business is the total amount of sales minus the cost of goods sold, interest, depreciation, taxes, and other expenses. Qualified business income is the net amount of qualified items of income, gain, deduction, and loss from a qualified trade or business.

How do I calculate my QBI?

You can calculate your QBI by filling out Form 8995 or Form 8995-A.