Table of Contents
The 20% Qualified Business Income (QBI) deduction is a tax deduction available to certain pass-through entities and sole proprietorships in the United States. It allows eligible taxpayers to deduct up to 20% of their qualified business income from their taxable income, reducing the overall tax liability.
Here’s an overview of the key points related to the 20% QBI deduction
Eligible Entities
The deduction is available to owners of pass-through entities such as partnerships, S corporations, limited liability companies (LLCs), and sole proprietorships. C corporations are not eligible for the QBI deduction.
Qualified Business Income
The deduction applies to income generated from qualified domestic businesses operated as sole proprietorships or through pass-through entities. This includes income from partnerships, S corporations, LLCs, and sole proprietorships, but excludes certain types of investment income, such as capital gains, dividends, and interest income.
Limitations and Phaseouts
The 20% QBI deduction may be subject to certain limitations and phaseouts based on the taxpayer’s taxable income, type of business, and other factors. Taxpayers with taxable income above certain thresholds may face limitations or phaseouts that reduce the amount of the deduction.
Specified Service Trades or Businesses (SSTBs)
Owners of SSTBs, such as those in the fields of health, law, accounting, consulting, financial services, and certain others, may face limitations or phaseouts of the QBI deduction based on their taxable income. Higher-income taxpayers engaged in SSTBs may have their QBI deduction reduced or eliminated entirely.
Calculating the Deduction
The 20% QBI deduction is calculated based on the taxpayer’s qualified business income, taxable income, and other factors. The deduction is generally taken on the individual owner’s tax return, such as Form 1040, Schedule C (for sole proprietors), Schedule E (for pass-through entity income), or Form 8995/8995-A (for certain taxpayers).
Consultation with a Tax Professional
Given the complexity of the QBI deduction rules and calculations, taxpayers are encouraged to consult with a qualified tax professional or accountant to determine their eligibility for the deduction and ensure compliance with IRS regulations.
Overall, the 20% QBI deduction provides significant tax savings for eligible pass-through entity owners and sole proprietors, helping to reduce the tax burden on small businesses and encourage entrepreneurship and investment.
Stay informed, stay compliant.
