I also found my QBI is much lower than my net business income. So, I post the previous answer to ChatGPT:
Someone says: "The 20% QBI deduction calculation compares the difference between 20% of the QBI (your Schedule C net income, minus any other deductions attributable to your Schedule C income, which encompasses deductions such as the solo 401K deduction, Self-Employed Health Insurance Deduction attributable to the business, and 1/2 of SE tax being deducted on your return) and 20% of your taxable income." Do you think it is correct?
The following is the response from ChatGPT:
That explanation is partially correct but somewhat misleading because it overstates the impact of certain deductions on QBI. Let's break it down properly:
Correct Aspects
- 20% of QBI vs. 20% of Taxable Income:
- The QBI deduction is the lesser of:
- 20% of QBI (Qualified Business Income)
- 20% of taxable income (before the QBI deduction, but after other deductions)
- 1/2 of Self-Employment Tax is Deducted
- The IRS allows 50% of self-employment tax as a deduction on Form 1040 (which reduces taxable income but does NOT reduce QBI itself).
Where the Explanation is Misleading
Solo 401(k) and Self-Employed Health Insurance DO NOT Reduce QBI
- Retirement contributions (Solo 401(k), SEP IRA, etc.) are NOT subtracted from QBI. They only reduce taxable income.
- Self-employed health insurance is also NOT subtracted from QBI, only from taxable income.
QBI Is NOT Always Just Schedule C Net Income Minus Those Deductions
- QBI starts with net income from Schedule C (or other business sources) but may require other adjustments (e.g., removing capital gains, dividends, interest).
- The statement implies that QBI is adjusted downward by Solo 401(k) & health insurance deductions, which is incorrect.
I am wondering if someone from Turbotax can provide a clue on how the software calculate the QBI.
