QBI Deduction

The Qualified Business Income (QBI) deduction is a tax deduction for eligible small businesses and self-employed individuals (including freelancers). It allows you to deduct up to 20% of your qualified business income from your taxable income.

What is the QBI Deduction?

The QBI (Qualified Business Income) deduction is a tax deduction for pass-through entities, such as sole proprietorships, partnerships, S corporations, and LLCs. It allows eligible taxpayers to deduct up to 20% of their qualified business income, subject to certain limitations and restrictions.

The QBI deduction was introduced as part of the Tax Cuts and Jobs Act of 2017 and is available for tax years 2018 through 2025.

Who is eligible for the QBI Deduction?

Individuals, trusts, and estates that own a pass-through entity and have qualified business income may be eligible for the QBI deduction. However, certain types of businesses, such as specified service trades or businesses (SSTBs), may be subject to additional limitations or exclusions.

For taxpayers with taxable income below a certain threshold, the QBI deduction may be available in full. For taxpayers with taxable income above the threshold, the deduction may be subject to additional limitations based on factors such as the type of business and the amount of W-2 wages paid by the business.

How is the QBI Deduction calculated?

The QBI deduction is generally calculated as 20% of the taxpayer's qualified business income. However, the deduction may be subject to certain limitations and restrictions, such as the W-2 wage limitation and the limitation based on the unadjusted basis of qualified property.

Qualified business income generally includes income from a qualified trade or business, but excludes certain types of income such as capital gains, dividends, and interest income. The determination of qualified business income can be complex and may require the assistance of a tax professional.

What are some limitations and restrictions of the QBI Deduction?

As mentioned earlier, the QBI deduction may be subject to limitations and restrictions based on factors such as the type of business and the amount of W-2 wages paid by the business. Additionally, certain types of businesses, such as SSTBs, may be subject to additional limitations or exclusions.

It is important to note that the QBI deduction is a temporary provision and is set to expire after tax year 2025, unless extended by Congress.

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