The Qualified Business Income (QBI) Deduction for the Small Business Owner

The Qualified Business Income (QBI) Deduction for the Small Business Owner

The Qualified Business Income (QBI) deduction is a tax deduction that allows eligible self-employed and small-business owners to deduct up to 20% of their qualified business income on their taxes. This deduction is available to those who have “pass-through income” – business income that is reported on their personal tax return.

QBI is the net amount of qualified items of income, gain, deduction, and loss from any qualified trade or business, including income from partnerships, S corporations, sole proprietorships, and certain trusts. Generally, this includes, but is not limited to, the deductible part of self-employment tax, self-employed health insurance, and deductions for contributions to qualified retirement plans (e.g., SEP, SIMPLE and qualified plan deductions).

QBI does not include items such as:

Items that are not properly includable in taxable income

Investment items such as capital gains or losses

Interest income not properly allocable to a trade or business

Wage income

Income that is not effectively connected with the conduct of business within the United States

Commodities transactions or foreign currency gains or losses

Certain dividends and payments in lieu of dividends

Income, loss, or deductions from notional principal contracts

Annuities, unless received in connection with the trade or business

Amounts received as reasonable compensation from an S corporation

Amounts received as guaranteed payments from a partnership

Payments received by a partner for services other than in a capacity as a partner

Qualified REIT dividends

PTP income

The QBI deduction is a valuable tax break for small business owners. It can help reduce the tax burden on their business income and increase their take-home pay. In general, total taxable income in 2023 must be under $182,100 for single filers or $364,200 for joint filers to qualify. In 2024, the limits rise to $191,950 for single filers and $383,900 for joint filers. If you’re over that limit, complicated IRS rules determine whether your business income qualifies for a full or partial deduction.

To summarize, the QBI deduction is a tax break that allows eligible self-employed and small-business owners to deduct up to 20% of their qualified business income on their taxes. It can help reduce the tax burden on their business income and increase their take-home pay. However, there are certain income limits and IRS rules that determine whether your business income qualifies for a full or partial deduction. If you’re a small business owner, it’s worth consulting with a tax professional to see if you qualify for the QBI deduction.

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