The Qualified Business Income deduction is for small business owners and self-employed individuals. But who qualifies for this deduction?
What is the QBI?
The QBI or Qualified Business Income deduction is a deduction designed for small business owners and self-employed persons. It allows them to deduct up to 20% of their qualified business income on taxes. In 2021, the limit for taxable income had to be lower than $164,900 for those filing singly. For joint filers, the income limit to qualify for the QBI deduction was $329,800. These limits are higher in 2022. Single filers in 2022 can make up to $170,050 and qualify for the deduction. The 2022 limit for joint filers is $340,100. For those who go over these limits, there are complex IRS rules used to determine whether your income from your business qualifies for either the full deduction or allows for a partial deduction. How does the QBI work?
Who Qualifies for the Qualified Business Income (QBI) Deduction?
The QBI deduction is for those who have business income reported on personal tax returns. It is often called “pass-through income.” Entities eligible for the QBI deduction include:
- Sole proprietorships
- LLCs – Limited Liability Companies
- S corporations
What is QBI or Qualified Business Income?
In the broadest terms, the qualified business income is the net profit of your business. The definition of “qualified business income” is the “net amount of qualified items of income” including gains and losses with respect to any trade or business. But not all business income qualified. The Qualified Business Income deduction excludes:
- Capital gains or losses
- Some guaranteed payments and wages made to shareholders and partners
- Income earned outside the United States
- Interest income
How does my business qualify for QBI?
Firstly, your income must be under the above-stated limits for your filing status. But if your total income (not just income from your business) is over the limit, it gets more complex. But you may still qualify, depending on the nature of your business. Even if you have a business that qualifies, you may not get the full 20% tax deduction. However, you may still be eligible for a partial deduction.
What happens if you are over the limit?
There are a few tests to determine whether or not you qualify for the deduction if your combined income is over the limit. One of the tests includes determining if your business is a “specified service trade or business.” Doctors, lawyers, actors, financial planners, and consultants are considered a “specified service trade or business.” But many of them still won’t qualify for the deduction because it goes away completely after your taxable income hits $214,900 for single individuals and $429,800 for those who are married filing jointly. Those limits will be raised to $220,050 and $440,100 respectively in 2022.
There are some tests for pass-through businesses that are over the income limit, but it can get complex and complicated. IRS guidelines help clarify how to determine if you qualify for the QBI deduction. You may also want to consult with a tax professional to learn if your tax situation qualifies.
How Does the QBI deduction work?
There are basically two aspects of the QBI or pass-through deduction to consider.
- There are two 20% figures. The QBI deduction can be taken for up to 20% of your taxable business income. However, if you claim the pass-through deduction, it cannot total more than 20% of your total taxable income (not just your business income). Use a Schedule C to figure your business income and expenses. Then, use Form 1040 to figure out your adjusted gross income. Once you have done that, then you can begin to calculate the pass-through deduction.
- You do not have to itemize to claim the qualified business income deduction. If you use the standard deduction, you can still claim the QBI.