I can't tell you how this happened with your business, but this is how it works. It might help you to see if there is an inconsistency.
The deduction depends on the taxpayer’s total taxable income, which includes wages, interest, capital gains, etc. in addition to QBI. At higher income levels, whether or not the business is an SSTB will also play a role.
Under $157,500 ($315,000 if filing jointly): The calculation is straightforward — 20% is applied to QBI or taxable income minus capital gains and dividends (whichever is less) to come up with the deduction. It doesn’t matter if the business is an SSTB; the QBI deduction comes out the same.
For instance, a taxpayer with $30,000 of QBI, $100,000 in total taxable income, and $5,000 in capital gains would simply apply 20% to their QBI because it’s the lesser of the two amounts ($30,000 vs. $95,000). In this case, they’d get 20% of $30,000 for a $6,000 deduction.
$157,500 to $207,500 ($315,000 to $415,000 if filing jointly): Here’s where things get complicated. Let’s start with a fictitious example so you can follow along.
Jack and Jill are joint filers, and here’s the info they’ll need to calculate their QBI deduction:
- Total taxable income = $400,000
- QBI = $300,000 (and 20% of QBI = $60,000)
- W-2 wages paid = $50,000
- Unadjusted basis of qualified property = $800,000
- Their restaurant business is not classified as an SSTB
First, they calculate their reduction ratio (this is just a variable needed in the final calculation):
- Formula for joint filers = (Taxable income – $315,000) ÷ $100,000
- Formula for all others = (Taxable income – $157,500) ÷ $50,000
Because they are filing jointly, Jack and Jill’s reduction ratio = ($400,000 – $315,000) ÷ $100,000 = 0.85.
Next, they calculate their excess amount, which is another number they'll need for the final calculation. It starts with the greater of these 2 amounts:
- 50% of W-2 wages paid, or
- 25% of W-2 wages paid plus 2.5% of the unadjusted basis of qualified property.
For Jack and Jill, these 2 amounts work out to $25,000 and $32,500 respectively, with the $32,500 being the greater amount. To calculate their excess amount, they subtract the greater amount figure of $32,500 from 20% of their QBI ($60,000) to come up with $27,500.
Now, all they need to do is plug these numbers into final QBI deduction formula:20% of QBI – (reduction ratio × excess amount) = QBI deductionThe QBI deduction for Jack and Jill’s restaurant business works out to:$60,000 – (0.85 × $27,500) = $36,625If Jack and Jill's business was classified an SSTB, for example a CPA firm or veterinarian practice, they would simply apply a special factor (1 minus their reduction ratio) to the previous result to calculate their QBI deduction:$36,625 x (1 – 0.85) = $5,493.75Phew! That was a ton of math, but if you happen to fall into this income bracket, rest assured that TurboTax handles this calculation with ease and in a lot less time than we took to explain it here.
Over $207,500 (over $415,000 if filing jointly)
SSTBs don’t qualify for the deduction, period.
For non-SSTBs, the deduction is either A or B, whichever is less:
- A = 50% of the business's W-2 wages paid (or 25% of the W-2 wages paid plus 2.5% of the business's unadjusted basis in all qualified property), whichever one is the greater amount
- B = 20% of QBI
If we borrow the numbers from Jack and Jill’s restaurant business (for illustration purposes only), their deduction would be the lesser of:
- A = $25,000 or $32,500 (whichever figure is greater, in this case $32,500), or
- B = $60,000.
Because A ($32,500) is less than B ($60,000), they get a $32,500 deduction.
If all of this sounds complicated, it is, at least when you get to the higher income levels. But the good news is TurboTax will take care of the calculations and let you know if you qualified and how much of a deduction you’re entitled to.
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