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Qualified Business Income (QBI) is related to, but not synonymous with, ordinary business income. QBI is a specific term used in the context of the Qualified Business Income deduction, which was introduced as part of the Tax Cuts and Jobs Act (TCJA) in the United States.
Here’s the distinction between QBI and ordinary business income
Ordinary Business Income
Ordinary business income refers to the regular income generated by a business from its primary operations. It includes revenue from sales, services, and other business activities minus the ordinary and necessary expenses incurred to generate that income.
This type of income is reported on the business’s tax return and is subject to the regular income tax rates applicable to the business entity (e.g., individual rates for pass-through entities).
Qualified Business Income (QBI)
QBI, on the other hand, is a specific category of income used to calculate the QBI deduction. It includes the net amount of qualified items of income, gain, deduction, and loss from any qualified trade or business operated by a U.S. taxpayer.
QBI does not include certain types of income such as capital gains or losses, dividends, interest income, and certain other investment-related income.
In summary, while ordinary business income is a broader term encompassing all income generated through regular business operations, Qualified Business Income is a specific subset of that income that is eligible for a deduction under the tax code. The QBI deduction aims to provide tax relief to certain pass-through business owners by allowing them to deduct a portion of their QBI when calculating their taxable income. The rules and limitations surrounding the QBI deduction are outlined in the U.S. tax code, and it’s advisable for businesses to consult with tax professionals to understand how these provisions apply to their specific circumstances.
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