Overview
The Qualified Business Income (QBI) deduction, also known as Section 199A, allows eligible pass-through business owners to deduct up to 20% of their qualified business income. This deduction applies to sole proprietorships, partnerships, S corporations, and some trusts and estates.
Who Qualifies?
- Owners of pass-through entities (sole proprietorships, partnerships, S corporations).
- Businesses operating within the U.S..
- Income earned through a C corporation or as an employee does not qualify.
How the Deduction Works
The deduction consists of two components:
- QBI Component – 20% of qualified business income from a domestic pass-through entity.
- REIT/PTP Component – 20% of qualified Real Estate Investment Trust (REIT) dividends and Publicly Traded Partnership (PTP) income.
*Income Limitations*
- The deduction is phased out for high-income earners.
- Specified Service Trades or Businesses (SSTBs) (e.g., law firms, medical practices, consulting) may face additional limitations.
*Calculation Considerations*
- The deduction is limited to the lesser of:
- 20% of QBI + REIT/PTP income, OR
- 20% of taxable income minus net capital gains.
- W-2 wages paid and qualified property basis may impact eligibility.
Common Pitfalls & How to Avoid Them
- Misclassifying Income: Ensure income qualifies under IRS rules.
- Ignoring Phase-Out Limits: Plan for taxable income thresholds.
- Overlooking Deduction Adjustments: Consider W-2 wages and property basis.
Tools & Resources
- IRS guidelines on Form 8995 & 8995-A for deduction calculations.
- Tax planning software for QBI deduction optimization.
- Financial advisors specializing in small business tax strategies.