Why is my QBI deduction so low compared to 20% of my business net income?

[wrwbear]

The QBI calculated by TT is only $236.  Yet, my total taxable income (MFJ) is $100,534 and my schedule C business net income is $10,372.  Reviewing the QBI Form 8995 worksheet from IRS, I would seem to qualify for 20% of the $10,372, give or take other minor subtractions from net income.  So, I think QBI deduction should be around $2,000 not $236.

All of my gross income is coming from a Form 1099-NEC.  Should my customer have used 1099-MISC instead?  Perhaps that might be the problem?

Thanks.

[ColeenD3]

No, your income was correctly reported on Form 1099-NEC.

 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.

[wrwbear]

Thanks.  I think I see it now.  I was going by the Schedule C net income and didn't understand that this figure would be further reduced by the self-employed health insurance deduction, which really shows up on another line in the 1040.

[renda000]

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.

[Mike9241]

I disagree QBI is schedule C income is reduced by 1/2 see tax, contributions to your retirement plans and the deduction for 1/2 your self employment tax. there should be a worksheet showing the calculation. in addition, there are limitations based on taxable income and additional limitations if your business is a specified service trade or busiimess.  yo can review form 8995 or 8995a fioor the calculation 

from the IRS website

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).

[renda000]

Thanks Mike9241 for the comment, which is basically the same as the response from ChatGPT. The issue I am facing now is that the calculated QBI shown in line 1 in Form 8995 is much lower than my business net income in schedule C (about 100k less), and I cannot figure out how Turbobox derives it. The QBI component ws in Turbobox shows the QBI and UBAI. But, it does not show how the QBI and UBAI are calculated.

[renda000]

I found the worksheet in Turbotax for calculating the QBI. It shows CQI = net business income (schedule C -  the retirement contributions and self-employed health insurance).