What is a Qualified Business Income Deduction?
The Qualified Business Income (QBI) deduction is a tax benefit introduced by the Tax Cuts and Jobs Act (TCJA) of 2017, designed to assist owners of pass-through entities such as sole proprietorships, partnerships, S corporations, and some trusts and estates. This deduction allows eligible taxpayers to deduct up to 20% of their qualified business income from their taxable income, thereby reducing their overall tax liability.
Eligibility Criteria
To qualify for the QBI deduction, taxpayers must meet specific criteria. The business must be a pass-through entity, and the owner must have qualified business income. Additionally, the deduction is subject to income limitations. For single filers, the deduction begins to phase out for those with taxable income exceeding $170,050 (for the 2022 tax year), while for married couples filing jointly, the threshold is $340,100.
Calculating the Deduction
The QBI deduction is calculated as the lesser of 20% of QBI or 20% of the taxpayer's taxable income minus net capital gains. It's essential to consider qualified REIT dividends and income from publicly traded partnerships as they may also affect the deduction.
Limitations
Certain professions, known as specified service trades or businesses (SSTBs), such as health, law, consulting, financial services, and athletics, may face additional limitations if the taxpayer's taxable income exceeds the specified thresholds. This can significantly impact high-income earners in these fields.
Overall, the Qualified Business Income deduction provides substantial tax savings for eligible business owners, encouraging entrepreneurship and investment in businesses across the country.