What Is QBID? The Qualified Business Income Deduction
Understand the Qualified Business Income Deduction (QBID). Learn how this complex tax break can reduce your taxable income as a business owner or self-employed individual.
The Qualified Business Income (QBI) deduction, also known as the Section 199A deduction, offers a tax benefit to eligible self-employed individuals and owners of pass-through businesses. This deduction originated from the Tax Cuts and Jobs Act (TCJA) of 2017. Its primary purpose is to reduce the tax burden on income generated by pass-through entities, such as sole proprietorships, partnerships, and S corporations.
Defining Qualified Business Income
Qualified Business Income (QBI) represents the net profit a business earns from a qualified trade or business. This includes income from a sole proprietorship (reported on Schedule C), a partner’s share of ordinary business income from a partnership, and a shareholder’s share of ordinary business income from an S corporation.
Certain income sources are specifically excluded from QBI. These exclusions include investment income (such as capital gains, dividends, and interest not directly related to the business), wages earned as an employee, reasonable compensation paid to an S corporation shareholder-employee, and guaranteed payments made to a partner. Income from specified service trades or businesses (SSTBs) can also be excluded if a taxpayer’s income exceeds specific thresholds.
Who Can Claim the Deduction
The QBI deduction is available to individuals, trusts, and estates that generate qualified business income. C corporations are not eligible, as they are taxed at the corporate level. The deduction provides tax relief to those whose business income is reported on their personal tax returns.
This “above-the-line” deduction reduces a taxpayer’s adjusted gross income (AGI). This is beneficial because it reduces overall taxable income regardless of whether the taxpayer itemizes deductions or takes the standard deduction. The deduction’s availability and amount are influenced by the taxpayer’s overall taxable income.
Understanding the Deduction’s Limitations
The QBI deduction is subject to various limitations that can reduce or eliminate it, primarily based on the taxpayer’s taxable income. These limitations become more complex with higher income. The deduction cannot exceed 20% of the taxpayer’s taxable income, calculated before the QBI deduction and certain capital gains.
For taxpayers whose taxable income is below a certain threshold, the calculation is straightforward. For 2024, this threshold is $191,950 for single filers and $383,900 for married filing jointly. If income falls below these amounts, the deduction is 20% of the QBI or 20% of the taxpayer’s taxable income, whichever is less. At this income level, there are no limitations based on W-2 wages, unadjusted basis immediately after acquisition (UBIA) of qualified property, or restrictions for specified service trades or businesses (SSTBs).
When taxable income falls within the phase-in range, W-2 wage and UBIA limitations begin to apply for all businesses, and the SSTB limitation also starts to phase in. For 2024, this range is between $191,951 and $241,950 for single filers, and $383,901 and $483,900 for married filing jointly. Within this range, QBI from an SSTB is partially reduced, and W-2 wage and UBIA limitations apply to both SSTBs and non-SSTBs.
If taxable income exceeds the upper threshold of the phase-in range ($241,950 for single filers and $483,900 for married filing jointly in 2024), full W-2 wage and UBIA limitations apply to all businesses. For SSTBs, the QBI deduction is eliminated once income surpasses this upper threshold. For non-SSTBs, the deduction is limited to the lesser of 20% of QBI or the greater of 50% of W-2 wages, or 25% of W-2 wages plus 2.5% of the unadjusted basis immediately after acquisition (UBIA) of qualified property. UBIA refers to the original cost of tangible depreciable property used in the business. This limitation allows businesses with significant capital investment or payroll to still benefit from the deduction even if their QBI is high.
Applying the Deduction to Your Business
The QBI deduction applies differently based on business structure. For sole proprietorships, QBI is calculated from the net profit reported on Schedule C of Form 1040. In partnerships, each partner’s share of ordinary business income (excluding guaranteed payments) contributes to their QBI. For S corporations, a shareholder’s QBI is their share of ordinary business income, after subtracting any reasonable compensation paid to them as an employee.
Taxpayers with multiple qualified trades or businesses may aggregate them for QBI deduction purposes. Aggregation treats these businesses as a single trade or business when applying W-2 wage and UBIA limitations. Conditions for aggregation include common ownership (at least 50% direct or indirect ownership for most of the tax year) and demonstrated integration, such as providing similar products or services, sharing facilities, or operating in coordination. Aggregation benefits taxpayers whose individual businesses might not meet wage or property thresholds on their own, allowing them to maximize their deduction.
To claim the QBI deduction, taxpayers use Form 8995, Qualified Business Income Deduction Simplified Computation, and attach it to their individual tax return, Form 1040. Form 8995 is used by taxpayers whose taxable income falls below the upper threshold for the deduction. For those with higher incomes or more complex situations, Form 8995-A, Qualified Business Income Deduction, is required. These forms calculate the QBI deduction a taxpayer can claim based on their income, business activities, and limitations.