Did you know you could be eligible for a tax break that doesn’t cost you anything or require you to do anything?
You are not required to purchase anything. You are not required to take any action. You qualify for this special tax break, known as the qualified business income deduction (QBI deduction), simply by the nature of your business and your business income.
What Is Qualified Business Income?
Qualified business income includes specific qualified income, gains or losses, and business income deductions. Only taxable income is counted, and income earned through a C corporation is not eligible.
Certain types of income must be excluded from the QBI deduction calculation. The majority of your company’s net income can be attributed to operations.
Qualified business income does not include the following types of income:
- Capital gains, losses, or dividends from investments
- Wage income
- Interest income or annuities that is not associated with the business
- Qualified real estate investment trust (REIT) dividends
- Qualified publicly traded partnerships (PTP) income
- Business income from outside the U.S.
- Guaranteed payments to a partner.
What’s the qualified business income deduction?
The qualified business income deduction (QBI) is a tax deduction that allows eligible self-employed and small-business owners to deduct up to 20% of their qualified business income.
To qualify, total taxable income in 2022 must be less than $170,050 for single filers or $340,100 for joint filers. The limits will increase to $182,100 for single filers and $364,200 for joint filers in 2023.
If you exceed that threshold, complicated IRS rules govern whether your business income is eligible for a full or partial deduction. Here’s how the qualified business income deduction works in general.
Which Business Types Can Claim the QBI Deduction?
Several factors determine whether you qualify for this tax deduction:
- Your business must be a sole proprietorship, partnership, or S corporation
- You need to know the amount of net income from that business for the year to see what income and deductions are qualified and which don’t qualify.
- You must calculate your total taxable income from all sources for the year
Only pass-through businesses can take this deduction. In pass-through businesses, the income from the business is taxed on the owner’s personal tax return.
Pass-through businesses are:
- Sole-proprietors and single-owner limited liability companies (LLCs) filing federal income taxes on Schedule C
- Partners in partnerships and multiple-member LLC owners filing partnership returns
- S corporation shareholders filing Schedule K-1 to report their share of S corporation income
Specified Services Trades or Businesses (SSTBs)
Some types of businesses, called specified services trades or businesses (SSTBs), may not be eligible for the entire QBI deduction if the owner’s income is above certain limits, which change yearly. These SSTBs include businesses involving the performance of services based on the reputation or skill of employees or owners (think: health care, law, accounting, performing arts, consulting, athletics, financial services, and investing)
How To Claim the QBI Deduction on Your Tax Return
Depending on your taxable income, the QBI deduction is calculated in two ways.
The simplified computation form is Form 8995. For the tax year 2022, you can use this form if your taxable income is less than $170,050 and you are a single filer, married, filing separately as head of household, or widow(er). If you are married and filing jointly, your income limit is $340,100.
Form 8995-A is for more complicated situations, such as SSTBs and multi-business owners.
Partners and S Corporation Owners
The QBI deduction is calculated differently for S corporation owners and partners (including owners of LLCs taxed as partnerships). First, the total QBI for the company is calculated using one of the two forms listed above. The owner’s share of the QBI is then calculated and entered on a separate line on the owner’s Schedule K-1, along with the owner’s other income. Schedule K-1 information is combined with the owner’s other income on the owner’s personal tax return.
If You Are over the Income Limit
If your income exceeds the limit, there are a few tests to see if you qualify for the qualified business income deduction. One such test is whether your company is a “specified service trade or business.”
If you’re a doctor, lawyer, consultant, actor, financial planner, and so on, your business is considered a “specified service trade or business,” and many high earners in these fields will lose this tax break once you reach a total taxable income of $220,050 if you’re single, and $440,100 if you’re married filing jointly in 2022. The limits for 2023 are $232,100 and $464,200, respectively.
What is my QBI if my Business isn’t Profitable?
You must net your profits and losses if you own more than one business. If the total QBI from all your businesses is less than zero, you have a negative amount that must be carried forward to the following year.
How Can I Learn More About the QBI Deduction?
The details about applying the QBI deduction to your situation aren’t easy to grasp. Fortunately, the deduction is figured for you if you use a paid tax return. If you want to understand this important deduction better, you can review IRS FAQs and instructions for the tax forms — Form 8995 and Form 8995-A — used to claim the deduction.
In conclusion, if you have a business that provides income to individuals or families, it is important to take advantage of the qualified business income deduction. This deduction can help reduce your taxable income and make paying taxes a little easier. To qualify for the deduction, your business must meet certain requirements, such as having a gross income of $600 or more per month. Be sure to consult with your accountant to see if the deduction is right for you.