What's the Qualified Business Income (QBI) deduction?
The Qualified Business Income deduction (also called the QBI deduction, pass-through deduction, or section 199A deduction) lets most self-employed taxpayers and small business owners exclude up to 20% of their qualified business income (QBI) from federal income tax.
The deduction amount depends on the taxpayer's total taxable income and the type of business. At higher income levels, the deduction is reduced or eliminated.
For the purposes of the deduction, QBI is defined as net business income, excluding:
Income generated outside the United States
Investment income
W-2 compensation paid to an S corporation owner
Guaranteed payments to a partner
Income from REITs, publicly traded partnerships, and qualified cooperatives (these entities may qualify for a 20% deduction under a different set of rules, the explanation of which is beyond the scope of this article)
TurboTax automatically calculates the QBI deduction using the business income entered. Keep an eye out for adjustments needed for things like capital gains or losses.
What types of businesses does this deduction apply to?
This deduction applies to Schedule C filers (sole proprietorships and other self-employed businesses), LLCs, partnerships, S corporations, estates, and trusts. Certain rental enterprises may also qualify.
Some types of service businesses (SSTBs) are disqualified once the taxable income on the return exceeds $247,300 ($494,600 if filing jointly). At higher income levels, the deduction for SSTBs is reduced and in some cases, eliminated.
For the purposes of the QBI deduction, an SSTB is defined as any trade or business that performs services in the fields of:
Accounting
Actuarial science
Athletics
Consulting
Health
Law
Performing arts
Financial services
Brokerage services (including investment management and investing, trading, or dealing in securities, commodities, or partnership interests)
Rental real estate qualifying as a business for the QBI deduction
There's a safe harbor allowing certain interests in rental real estate, including interests in mixed-use property, to be treated as a trade or business for purposes of the qualified business income deduction.
If all the safe harbor requirements are met, an interest in rental real estate will be treated as a single trade or business for purposes of the deduction. If an interest in real estate fails to satisfy all the requirements of the safe harbor, it may still be treated as a trade or business for purposes of the deduction if it otherwise meets the definition of a trade or business.
More information can be found here.
How do I get this deduction?
Go to Federal, then select Other.
Continue until you’re asked Is this Qualified Business Income? Select an answer.
QBI is the net amount of qualified income, gains, deductions, and losses from a qualified business. This includes income from partnerships, S corporations, sole proprietorships, and certain trusts.
When asked - Does this business receive income from specified services? screen, select an answer.
Specified services (SSTBs) are listed above, under What types of businesses does this deduction apply to?
Enter amounts in the applicable boxes on the next screen.
Adjustments may be needed to W-2 wages and unadjusted basis immediately after acquisition (UBIA).
Double-check the 199A Worksheet by Activity.
In Forms mode, see if the questions about whether the company is a "qualified trade or business" and a "specified service trade or business" were answered.
Double-check the 199A worksheet info for W-2 wages and UBIA.
To view the QBI Statement attached to the Partner/Shareholder’s K-1 package, go to Forms mode, then the Schedule K-1 (name) Statement A: Schedule K-1 - 199A Supplement.
The amounts should align with the 199A Supplement.
