Qualified Business Income Deduction

The Qualified Business Income Deduction (QBI) is a valuable tax benefit that can significantly reduce taxable income for eligible business owners. This deduction, introduced by the Tax Cuts and Jobs Act, allows many taxpayers to deduct up to 20% of their business income. However, understanding the rules and limitations is essential to maximize this opportunity. In this guide, we’ll break down everything you need to know, from eligibility requirements to calculation methods and income limits.

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December 17, 2024

What is the Qualified Business Income Deduction?

The Qualified Business Income Deduction (QBI), also known as Section 199A, allows eligible taxpayers to deduct up to 20% of their qualified business income on their personal tax return. This deduction applies to active business income from sole proprietorships, LLCs, S Corporations, partnerships, trusts, and estates.

However, income from C Corporations and specific categories, such as interest income, capital gains, and foreign income, does not qualify for the deduction.

QBI Deduction Calculation

The QBI deduction is the smaller of the following:

20% of QBI plus 20% of REIT dividends and qualified Publicly Traded Partnership (PTP) income
20% of taxable income minus net capital gain

Note: The deduction is unaffected by whether you take the standard or itemized deduction. However, it does not reduce self-employment taxes.

Income Limits for the QBI Deduction

For taxpayers to claim the full 20% QBI deduction, their taxable income must not exceed the following thresholds:

Single filers: $191,950
Married filing jointly: $383,900

If your taxable income exceeds these thresholds, the deduction begins to phase out.

For single filers earning more than $241,950 and joint filers earning more than $483,900, the deduction is limited to the lesser of:

50% of W-2 wages paid, or 25% of W-2 wages, plus 2.5% of unadjusted basis in all qualified property, whichever is greater
20% of QBI

Example:
A single filer has $250,000 taxable income, $150,000 QBI, paid $40,000 in wages, and owns a building worth $300,000.

Option 1:
- 50% x $40,000 = $20,000
- (25% x $40,000) + (2.5% x $300,000) = $17,500
Option 2:
- 20% x $150,000 = $30,000

The greater of option 1 is $20,000. The QBI deduction is $30,000 (higher than $20,000).

Specified Service Trades or Businesses (SSTBs)

Owners of (SSTBs), such as healthcare, law, consulting, and performing arts, cannot claim the deduction if their income is over $241,950 as a single filer and $483,900 as a joint filer in 2024.

QBI Deduction for Rentals

Rental income is generally considered passive and does not qualify for the QBI deduction. However, rental property owners may qualify if they meet specific IRS criteria under:

Real estate professional rules, or
Section 162 rental enterprise requirements

Real Estate Professional Criteria:

Over 50% of work hours in real estate businesses.
At least 750 hours annually are spent on real estate activities.
Material participation in each rental activity (visit the IRS website for more information)

Section 162 Criteria:
Rental owners who do not meet the above criteria can qualify under Section 162 if they:

Maintain separate books for each rental enterprise.
Keep contemporaneous records of dates, activities, and time spent.
Perform at least 250 hours of rental services annually, such as tenant screening, advertising, and property management.

Maximizing Your Qualified Business Income Deduction

The Qualified Business Income Deduction provides significant tax savings for eligible business owners and rental property owners who meet the necessary criteria. Whether you’re navigating income limits, calculating your deduction, or determining eligibility for rental income, understanding the details is crucial to maximizing your tax benefits. If you need expert guidance to make the most of your deduction, our team at DuPage Tax Solutions is here to help.

References

Qualified Business Income Deduction | Internal Revenue Service. https://www.irs.gov/newsroom/qualified-business-income-deduction