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 positive and negative QBI amounts. In this fact pattern tutorial, the taxpayer is the managing member of an LLC partnership and receives a Schedule K-1 (Form 1065) each tax year. In 2021, the ordinary loss from the K-1 is ($3,090) and negative QBI of ($3,090). Because John’s QBI was negative for 2021, the loss was unused and carried forward to the 2022 tax year.
In 2022, the taxpayer received a Schedule K-1, which shows Line 1 ordinary income of $8,060 and a positive QBI of $8,060. John must net the $8,060 positive QBI with the loss carryforward of $3,090.
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.
Additional Limits for SSTB
For the 2022 tax year, the following limits apply to QBI from an SSTB:
- Taxpayer with Income Between $170,050 and $220,050. Deduction may be limited because of the phase-outs for QBI, W-2, and the Unadjusted Basis Immediately After Acquisition (UBIA)
- Taxpayer with Income Over $220,050. No deduction is allowed.
Additional Guidance
For additional guidance on other scenarios covering Form 8995, see our other pages & videos here:
- IRS Form 8995 for REIT Dividends
- IRS Form 8995 for PTP Income
- IRS Form 8995-A with for QBI Deduction
Summary of 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.