The Tax Cuts and Jobs Act (TCJA) added the Qualified Business Income (QBI) deduction under Section 199A of the Internal Revenue Code (IRC).

Under Section 199A(b)(2), a taxpayer’s QBI deduction is the lesser of the following two amounts:1

  1. 20% of QBI, or
  2. the greater of
    1. 50% of Form W-2 wages, or
    2. 25% of Form W-2 wages, plus 2.5% of the UBIA of qualified property used in the trade or business.

A company calculates its UBIA under Section 199A(b)(6), which generally equals the cost of tangible property subject to depreciation which meets the following criteria:

  1. The property is held by and available for use in the trade or business at the end of the tax year;
  2. The property is used during the year to generate the company’s QBI; and
  3. The property’s depreciable period for UBIA has not ended before the close of the taxpayer’s current tax year. 

What’s important to remember about UBIA property is that the business does not depreciate it from its original cost basis. The ability to use the UBIA property will end on the later of 10 years after the property is first placed into service or the last day of the last full year in the applicable recovery period under IRS Section 168(c).

Example UBIA Calculation

Company Bravo LLC, a Florida limited liability company (LLC), operates a lawn care business in Florida. The company was formed on January 1, 2022, and immediately commenced operations. 

In 2022, the company purchased a Ford F-250 truck for $50,000. The vehicle is used 100% for business and has no personal use. The company elected bonus depreciation to deduct 100% of the vehicle cost for income tax purposes. The vehicle is the only asset on the company’s balance sheet. 

The company’s Form 4562 (Depreciation and Amortization) shows a full deduction of $50,000, which reduces the asset’s adjusted basis to zero. 

For purposes of UBIA calculation, the company does not consider the 100% bonus depreciation deduction. The company’s UBIA property remains at $50,000 because this is the the basis of the property without considering any depreciation under Section 168. 

It is quite common for a company’s assets to be fully depreciated under the Modified Accelerated Cost Recovery System (MACRS) but still be included as part of UBIA because the assets were placed into service within the ten year window. 

  1. IRC § 199A(b)(2) ↩︎