What is the QBI Deduction?

The Qualified Business Income (QBI) deduction was added to the U.S. tax code in 2017 as part of the Tax Cuts and Jobs Act (TCJA) and provides tax relief for pass-through entities (partnerships and S corporations) and sole proprietors filing Schedule C with Form 1040.  

Fact Pattern in Example

The example in the video tutorial is a Form 8995 for a taxpayer with qualified business income from a Schedule C sole proprietorship business and a publicly traded partnership (PTP).

QBI from a PTP must be separately calculated and reported on Form 8995. The taxpayer does not net the PTP amounts with QBI for ordinary trade or business income reported in Part 1.

Understanding the QBI Deduction

The QBI deduction allows qualifying individuals to deduct up to 20% of their net qualified business income (QBI) from certain pass-through entities and sole proprietorships.

The overall QBI deduction comprises two components:

QBI Component under Section 199A(b)(1)(B). The deduction equals 20% of QBI from domestic businesses that are partnerships, S corporations & sole proprietorships. Potentially subject to limitations based upon the taxable income of the taxpayer, type of business, amounts of W-2 wages & UBIA of property REIT/PTP Component under Section 199A(b)(1)(B).

A taxpayer separately computes the REIT and PTP QBI deduction from the first QBI component. The deduction equals 20% of the qualified REIT dividends and qualified PTP income. There are no limitations on W-2 or UBIA amounts.  

Step 1: Basic Information

Enter your name and taxpayer identification number (TIN) at the top of Form 8995. Your TIN is generally your Social Security Number.

Step 2: Complete Line 1

Enter the name & TIN for each of your qualified trades or businesses on a separate line item. You can leave this section blank if you only have PTP income or qualified REIT dividend income eligible for the deduction.   

Step 3: Enter your total QBI on Line 2

In this section, you’ll enter the QBI amounts from businesses listed on Lines 1 and any carryforwards from prior years. Calculate the qualified business income component by multiplying line 4 by 20%.

Step 4: Enter Qualified REIT & PTP Income

Enter your total qualified REIT dividends and PTP income on lines 6 and 7. Calculate the QBI amount by multiplying Line 8 by 20%.  

Step 5: Report and Calculate Your Overall QBI Deduction

The overall limitation is that the deduction cannot exceed 20% of the taxpayer’s taxable income, which is reduced by net capital gains.

Calculate the total amount of qualified business income deduction (Line 15) and report on your tax return.  

Step 6: Report the Net QBI Deduction on Form 1040

An individual taxpayer reports their QBI deduction on page 1 of Form 1040, line 13 for the Qualified Business Income deduction.  

Additional Guidance

For additional guidance on other scenarios covering Form 8995, see our other pages & videos here:

Summary on QBI Deduction

The Section 199A deduction provides tremendous benefits to owners of eligible businesses and investors in publicly traded partnerships (PTP) and Real Estate Investment Trusts (REIT).

Taxpayers should always consult with a qualified tax professional to determine their eligibility. A professional can also help ensure you maximize your QBI deduction while complying with tax laws and regulations.