Table of Contents
The calculation of Qualified Business Income (QBI) involves several steps and considerations, primarily for individuals who operate pass-through entities such as sole proprietorships, partnerships, S corporations, and certain trusts and estates. Here’s an overview of how QBI is calculated
Determine Eligible Income
QBI includes income, gains, deductions, and losses from qualified trades or businesses that are effectively connected with a U.S. trade or business. It typically excludes investment income such as capital gains, dividends, and interest income.
Identify Qualified Trades or Businesses
Qualified trades or businesses are those that are not specifically excluded by the tax code. Certain specified service trades or businesses (SSTBs), such as those in health, law, accounting, consulting, and financial services, may face limitations or phaseouts depending on the taxpayer’s taxable income.
Calculate QBI
Once eligible income and qualified trades or businesses are identified, QBI is calculated as the net amount of qualified income, gains, deductions, and losses from these businesses. This calculation considers ordinary income and deductions related to the business operations.
Apply Deductions and Limitations
Taxpayers may be eligible for the QBI deduction, which is generally 20% of QBI subject to certain limitations. The deduction is subject to various thresholds, phaseouts, and limitations based on the taxpayer’s taxable income, type of business, and other factors.
Consider Other Factors
Taxpayers must also consider other factors such as W-2 wages paid by the business and unadjusted basis in qualified property held by the business. These factors may impact the calculation of the QBI deduction, especially for businesses with higher taxable income.
Report on Tax Returns
QBI and the QBI deduction are reported on the taxpayer’s individual income tax return, typically on Form 1040 or 1040-SR. Additional forms, schedules, or worksheets may be required to calculate and report QBI accurately.
Seek Professional Advice
Given the complexity of QBI calculations and the various factors involved, taxpayers are encouraged to seek professional tax advice from qualified tax professionals or advisors to ensure accurate calculation and reporting.
By following these steps and considering the specific rules and limitations outlined in the tax code, taxpayers can calculate their QBI accurately and maximize their eligibility for the QBI deduction.
Stay informed, stay compliant.
