If I deduct my business expenses on Schedule C from my Business Sales, do I still qualify to take the "Qualified Business Income Deduction"?

[Coleen3 · Accepted solution]

Yes, you are entitled to deduct your expenses and still qualify for the Qualified Business Income.

The Qualified Business Income deduction (also called the QBI deduction, pass-through deduction, or section 199A deduction) was created by the 2017 Tax Cuts and Jobs Act (TCJA) and is in effect for tax years 2018 through 2025.

With the QBI deduction, most self-employed taxpayers and small business owners can exclude up to 20% of their qualified business income from federal income tax (but not self-employment tax) whether they itemize or not.

The deduction amount depends on the taxpayer's total taxable income, which includes wages, interest, capital gains (etc.) in addition to income generated by the business. Once the taxable income reaches or exceeds $157,500 ($315,000 if filing jointly), the type of business also comes into play.

At incomes below that level, the deduction is 20% of either taxable income (minus capital gains and dividends) or the QBI, whichever is less.

At higher income levels, the deduction is reduced or eliminated, depending on the nature of the business. The calculations also get quite complicated, but TurboTax easily handles them and will figure out how much of a deduction you’re entitled to.

[mac500m]

Thank you TurboTaxColeen!  I wanted to make sure I was not double dipping with the QBI deduction and it appears that I am not from everything I have read and also received your commentary.  Let's see if the IRS pushes back!  Onward!

[Coleen3]

Let me clarify. You are allowed to take deductions. But, QBI is the net amount of qualified items of income, gain, deduction and loss from any qualified trade or business. Only items included in taxable income are counted. In addition, the items must be effectively connected with a U.S. trade or business. Items such as capital gains and losses, certain dividends and interest income are excluded.

[mac500m]

Understood.  Thanks again.

[Coleen3]

My pleasure.

[opraman]

Just to confirm.  When taking the pass-through deduction, this is after all deductions on the schedule C which is your net profit? For example, if my net profit is $9500 after deductions, the pass-through deduction would be $1,900 which is 20%?  Is this correct?  Also, I file joint and my wife is a w2 employee.  Do I just calculate this off of my schedule C income for my business and then move the amount for that deduction to the 1040?

[VolvoGirl]

Turbo Tax will figure it all out for you.  Don't worry about it.  Here's some other info on it.

The IRS released the Final Regulations that clarified that

(1) the 1/2 SE tax deduction,

(2) Self Employed Health Insurance deduction, and

(3) employer retirement contributions

need to be subtracted from your business profit to determine "Qualified Business Income" (QBI) for the 20% deduction.

[opraman]

I'm actually doing the taxes myself.  I just have this one question in regards to the 20% pass through.  

How do the calculations change if you are married with a spouse that's a w-2 employee? Do I just take my net on my schedule minus the 1/2 SE tax deduction, SE health insurance deduction, and employer retirement contributions and then multiply the 20%? For example, my net income of $9,773 minus the 1/2 SE employment deduction puts me at $9,082. Would the 20% deduction be $1,816? or do I get the full deduction of $1955 because my wife has a w-2 income of $46,471? I'm a little confused.