Do C Corps Get the Qualified Business Income Deduction?

The Qualified Business Income (QBI) deduction, also known as the Section 199A deduction, offers a tax benefit to owners of certain businesses. This provision allows eligible taxpayers to deduct up to 20% of their qualified business income. C corporations are not eligible for this deduction.

Understanding the Qualified Business Income Deduction

The QBI deduction, established by the Tax Cuts and Jobs Act of 2017, aims to provide tax relief for owners of specific business structures. It reduces the effective tax rate on income from these businesses. Eligible taxpayers can deduct up to 20% of their qualified business income, which is the net income or loss from a trade or business. This deduction is taken on an individual’s personal tax return.

Entities Eligible for the QBI Deduction

The QBI deduction is available to owners of “pass-through” entities, where business income is reported directly on the owner’s personal tax return. These include sole proprietorships, businesses owned by a single individual. Partnerships, owned by two or more individuals who share profits and losses, also qualify.

S corporations, which pass income, losses, and deductions through to shareholders, are another eligible entity. Limited Liability Companies (LLCs) can also qualify if taxed as sole proprietorships, partnerships, or S corporations. In these structures, the business does not pay corporate income tax; instead, income passes through to the owners, who pay taxes at their individual income tax rates.

C Corporations and QBI Eligibility

C corporations are excluded from QBI deduction eligibility. This exclusion stems from the difference in how C corporations are taxed compared to pass-through entities. A C corporation is treated as a separate legal entity from its owners for tax purposes, paying corporate income tax on its profits at the entity level.

After the corporation pays taxes on its earnings, any profits distributed to shareholders as dividends are taxed again at the individual shareholder level. This is commonly referred to as “double taxation.” The QBI deduction was designed to provide a tax benefit for pass-through business owners, in part to counterbalance the reduction in the corporate tax rate from 35% to 21% under the Tax Cuts and Jobs Act. Since C corporations already benefited from this rate reduction, the QBI deduction was not extended to them.