The Qualified Business Income (QBI) Deduction

 Certain individuals with business income can lower their taxable income.

The qualified business income deduction (QBI deduction) allows some individuals to deduct up to 20% of their business income, REIT dividends, or PTP income on their individual income tax returns. Those who can claim the QBI deduction include sole proprietors, the partners of a partnership, the shareholders in S Corporations, as well as some trusts and estates. 

QBI deduction is for individual taxpayers. Qualified business income is defined as “the net amount of qualified items of income, gain, deduction and loss with respect to any trade or business.” Basically, it’s any business income that you report on your personal tax return, or your businesses’ “net profit”. 

The QBI deduction lowers your taxable income, which is the amount used to determine how much annual income tax you owe. Filers can claim the deduction whether they take the standard deduction or itemize their deductions. 

Pass-through entities that may be able to claim the QBI deduction include:

  • Sole Proprietorships

  • Partners in Partnerships

  • Shareholders in S Corporations

  • Members of a Limited Liability Corporation (LLC)

  • Beneficial Owners of a Trust or Estate 

For a better definition or more thorough definition of what qualifies under those types of entities, please see either an attorney or a qualified tax professional. 

This deduction was created by the Tax Cuts and Jobs Act of 2017, a major reform of the federal tax code. Section 199A details the deduction, so you may also see it called the Section 199A deduction. 

Qualified business income is taxable income that comes from a domestic business. If a business also has foreign income, only domestic income is eligible for QBI. Qualified business income does not include the following: 

  • Employee wages or salaries

  • Nontaxable income, like municipal bond interest

  • Capital gains or losses

  • Foreign currency gains or losses

  • Most investment dividends

  • Qualified REIT (real estate investment trust) dividends

  • Publicly traded partnership (PTP) income

  • Interest income

  • Income, loss, or deductions from a notional principal contract (NPC)

  • Annuities that weren’t received as part of conducting business 

The full QBI deduction is worth the lesser of: 

  • 20% of your qualified business income, plus 20% of your qualified REIT dividends and qualified PTP income, OR

  • 20% of your taxable income minus your net capital gain 

The exact value of your deduction depends on how much income you have. As long as your taxable income — before considering the QBI deduction — is less than the income threshold, you can claim up to the full deduction.

Certain occupations including attorneys, accountants, and financial planners are not eligible. 

For more help understanding whether your income qualifies for the QBI deduction, consider talking with a CPA or tax attorney. 

Rock Solid Law recommends learning more about QBI and how to get started including the article “IRS isn't verifying millions in QBI deductions”. Email us at questions@rocksolidlaw.com and we will be glad to get that information to you on how to claim that deduction, how to get started and particularly the interesting article that we sourced, and the fact that the IRS isn't verifying millions in QBI deductions. Obviously, QBI came about in 2017 which was before the pandemic hit but, it continues now and is important for everyone's consideration as are of course the tax benefits that have come into play since the pandemic started. We always advise our clients that it is our duty as citizens to pay the mandatory taxes that are levied by our Republic the United States of America, but we don't want to pay voluntary taxes so please be advised and seek representation concerning those tax benefits that have come as a result of the Coronavirus pandemic as well as the QBI deduction that may be available to you.  

John Miller, our founding attorney, created Rock Solid Law to focus on the unique needs of the Jacksonville and Beaches area business community. For over 30 years Rock Solid Law has provided expert guidance and advice to clients in the areas of Estate Planning, Trusts, Wills & Probate, Real Estate: Residential & Commercial, Closings, Title & Escrow, and Small Business Representation.

Attorney John Miller and Rock Solid Law & Title, provide expert guidance in all areas of Small Business Representation, Real Estate Closings, Title & Escrow, Estate Planning/Trusts & Wills and Probate and Trust Administration.