QBI Deduction very low?

[farmerjohn1324]

This question is about why my QBI deduction seems so low. My QBI is $259,220.92 and my taxable income before QBI deduction is $228,331.35.

On 8995A I take the excess above $182100 (filing single) of my taxable income and this gives me $46231,35, which gives a 92.5% when divided into $50000.

I subtract this number from 20% of my QBI (51844.18) and I am left with just $3888.31 as my QBI deduction to put on Line 13 of the 1040. Is this accurate? I pay myself no W2 wages. I only have income from the Schedule C.

It makes no sense that I would have had such a larger QBI deduction if I was at $182100 or less. If I were there, I would have gotten 20% of it, but this number amounts to just 1.5% of my QBI.

Can this actually be accurate?

[DawnC]

Yes.  It gets complicated when you get to the higher income levels.   TurboTax uses the formulas below to determine and report your deduction.  Is your business considered an SSTB (specified service trade or business)?    This is important because being an SSTB reduces or eliminates the 20% Qualified Business Income (QBI) deduction at higher income levels.   Qualified Business Income (QBI) is 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)

The deduction depends on the taxpayer’s total taxable income, which includes wages, interest, capital gains, etc. in addition to QBI.   At higher income levels, whether the business is an SSTB will also play a role.   There are 3 levels to the calculation.   Without any wages paid, the Unadjusted Basis of Qualified Property will be a key number.  

Under $182,100 ($364,200 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. It doesn’t matter if the business is an SSTB; the QBI deduction comes out the same.

$182,100 to $232,100 ($364,200 to $464,200 if filing jointly:( Here’s where things get complicated; at this level, the deduction is reduced.  You can see a detailed example in this help article.  See the Reduction Ratio and how it is applied to the excess amount.  

Over $232,100 (over $464,200 if filing jointly):  SSTBs don’t qualify for the deduction.  For non-SSTBs, the deduction is either A or B, whichever is less:

• A = 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 one is the greater amount
• B = 20% of QBI

[Mike9241]

yes it is. for a single person once taxable income goes above 182100 for 2023 the Qbi deduction is phased out (or the way the Congress/IRS tells it the reduction is phased-in) 

and would be completely gone if your table income was 232100

you have excess taxable income of 46231 (228331-182100)

that's about 92.46% of 50000 (the range above 182100 in taxable income where the QBI deduction is phased out (or as Congress and the IRS put it the reduction is phased-in)

so your tentative QBI of 51844 (259221 x 20%)

is reduced by 92.46 % or  47935

so the remaining QBI would be 51844-47935 or 3909. the small difference is that 92.46% rather than 92.50% is used (4 decimal places)

so the more your taxable income is above 182100 (at least for 2023 since this amount changes every year) the smaller the QBI deduction gets 

the sad part is that if you were married with the same numbers you would have gotten the full 51844. that's because for a married individual the phase-out starts at 364200 and wouldn't be completely eliminated until taxable income reached 464200 for 2023