Qualified Business Income (QBI) deduction

The Qualified Business Income deduction also called the QBI deduction or 199A deduction. It was created by the Tax Cuts and Jobs Act (TCJA) and it is in affect for tax years 2018 to 2025

QBI allows small business owners to deduct up to 20% of their qualified business income from an S corporation, partnership, sole proprietorship, trust or estate at the owner level. It allows additional 20% of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income.

The qualified business income includes only income associated with business activity conducted in the United States. It does not allow reasonable owner compensation, investment income (including capital gains) or guaranteed payments to a partner.

The QBI deduction amount depends on the taxpayer's total taxable income, which includes wages, interest, capital gains etc., in addition to income generated by the business. Once the taxable income reaches or exceeds $157,500 ($315,000 if filing jointly), the type of business also comes into play. For all incomes below that level, the deduction is 20% of either taxable income (minus capital gains and dividends) or the QBI, whichever is less. At higher income levels, the deduction is reduced or eliminated, depending on the nature of the business.

This deduction could be very beneficial to business owners and result in tax savings.

The calculation for the QBI deduction is complicated, so you need to consult with your tax advisor.

For more detailed information on QBI you may also visit IRS website:
https://www.irs.gov/newsroom/qualified-business-income-deduction