Switch to the FORMS mode and review the worksheets ...
How is the
deduction calculated?
That
will depend on the business owner’s total taxable income, which
includes nonbusiness income (wages, interest, capital gains, etc.) as well as
business income.
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.
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 start getting complicated.
We’ll explain it below, but rest assured that TurboTax will handle this
calculation with ease. 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
deduction:
·
Total taxable income = $400,000
·
QBI = $300,000
·
20% of QBI = $60,000
·
W-2 wages paid = $50,000
·
Unadjusted basis of qualified
property = $800,000
·
Their business is not classified
as an SSTB
They
first need to figure their reduction ratio. The formula is:
·
(Taxable income – $315,000) ÷
$100,000 for joint filers
·
(Taxable income – $157,500) ÷
$50,000 for all others
Jack
and Jill’s reduction ratio = ($400,000 – $315,000) ÷ $100,000 = 0.85.
Next,
they need to figure their excess amount. 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. To
figure their excess amount, they subtract the greater amount ($32,500) from 20%
of their QBI ($60,000) to come up with $27,500.
Now,
they plug their numbers into this formula to calculate their deduction:
20% of QBI – (excess amount x reduction ratio)
The
deduction for Jack and Jill’s non-SSTB business = $60,000 – ($27,500 x 0.85)
= $36,625.
Now,
if their business was an SSTB, they would simply
apply a special factor (1 minus their reduction ratio, or 0.15) to the above
result to calculate their deduction (in this case, 0.15 x $36,625 for a
deduction of $5,493.75).
Over
$207,500 (over $415,000 if filing jointly)
SSTBs
don’t qualify for the deduction. For non-SSTBs, the deduction is the lesser of:
·
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 is the greater amount, or
·
20% of QBI.
For
illustration purposes, if we reuse the numbers from Jack and Jill’s business,
the deduction would be the lesser of:
·
$25,000 or $32,500 (whichever is
greater) or
·
$60,000
which
works out to a $32,500 deduction.
If
all of this sounds complicated… well, it is, at least at the higher income
levels. TurboTax will take care of the calculations and let you know if you
qualified and how much of a deduction you’re entitled to.
Related
Information:
·
How will tax reform affect my 2018 federal tax return?
·
Do I qualify for the qualified
business income deduction?
·
Do I need to incorporate to get
the qualified business income deduction?
