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Qualified Business Income Deduction Cheat Sheet

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:

  1. QBI Component – 20% of qualified business income from a domestic pass-through entity.
  2. 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.