What is Qualified Business Income Deduction?

What is Qualified Business Income Deduction (QBID)? Can you claim it?
Before the Tax Cuts and Jobs Act law (pre 2018), there was no special deduction for qualified business income (QBI). After the Tax Cuts and Jobs Act law was passed, the new QBI deduction came into existence. The deduction is generally 20% of a taxpayer’s QBI from a partnership, S-corp, or sole proprietorship, defined as the net amount of items of income, gain, deduction and loss with respect to the trade or business. One word of warning, the QBI deduction will go away after 12/31/2025, unless it is extended by Congress.

If the net amount of qualified income, gain, deduction and loss relating to the qualified trade or business of the taxpayer for any tax year is less than zero, the amount is carried forward as a loss from a qualified trade or business in the succeeding tax year.

Unless the taxpayer is below the threshold amounts (explained below), the deductible amount for a qualified trade or business is the lesser of: a) 20% of the taxpayer’s qualified business income from the qualified trade or business or b) the greater of (I) 50% of the W-2 wages relating to the qualified trade or business or (II) the sum of (i) 25% of the W-2 wages relating to the qualified trade or business and (ii) 2.5% of the unadjusted basis immediately after
acquisition of all qualified property.

However, the wage limitation does not apply for taxpayers below the threshold amount of $157,500 ($315,000 for a joint return). For tax years beginning after 2018, this amount will be increased based generally on inflation.

Note, that QBI doesn’t include 1) reasonable compensation paid to the taxpayer by any qualified trade or business of the taxpayer for services rendered for the trade or business. 2)  any guaranteed payment paid to a partner for services rendered for the trade or business. And 3) any guaranteed payment to a partner outside of his partner capacity for services rendered for the trade or business.

Bottom line, the QBI deduction will potentially benefit anyone that has a sole proprietorship, partnership or S-corporation. The reason that the QBI deduction was implemented in the first place, is because the corporate tax rate went from 35% to 21% for the 2018 tax year and Congress wanted to give individual taxpayers a break on their rates. The QBI deduction is Congress’s way to try to bring individual tax rates in parity with corporate tax rates.

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