Individuals, trusts, and estates with qualified business income (QBI) from a partnership, S corporation, or sole proprietorship may qualify for the QBI deduction. Any income you receive from a C corporation isn’t eligible for the deduction.
Some factors such as income limits and the type of business you run may affect your eligibility. Keep reading to find out if you qualify for the QBI deduction.
Who can claim the QBI deduction?
Let’s start out easy. If your 2020 taxable income is less than $329,800 as a married filing jointly (MFJ) taxpayer or $164,900 as any other tax filing status – good news! You’re able to claim this 20% deduction on your qualified business income or taxable income.
That’s it. Pretty straightforward, right?
Who can’t claim the QBI deduction?
Unfortunately, if your 2021 taxable income is greater than $429,800 (MFJ) or $214,900 (other) and your business is a specified service trade or business, you can’t claim this deduction. At all.
What’s a specified service trade or business (SSTB)? Businesses that fall within the following industries:
- Actuarial science
- Performing arts
- Investing & investment management
- Dealing in securities, partnership interests, or commodities
- Any business with a principal asset of a reputation or skill of one or more of its employees or owners
If you don’t know whether your business is a SSTB, the IRS regulations state, “In many cases, the determination of whether a specific trade or business is an SSTB depends on whether the facts and circumstances demonstrate that the trade or business is in one of the listed fields,” (TD-REG-107892-18).
Essentially, each business is unique. The IRS doesn’t have clear-cut rules on which businesses fall within these categories. You and your tax professional will need to analyze your business, determine the services it provides, and decide whether it’s a specified service trade or business.
QBI deduction limitations
If your business is an SSTB and your taxable income is between $329,800 and $429,800 (MFJ) or $164,900 and $214,900 (other), your deduction faces limitations. These limitations are W-2 wages and W-2 wages and qualified property. They’re phased in and based on your taxable income. Calculate these limitations to find your final deduction amount.
If your 2021 income is more than $329,800 (MFJ) or $164,900 (other) and it’s earned from a qualified trade or business, your deduction is also subject to the W-2 wages limitation or the W-2 wages and qualified property limitation. Qualified businesses are those that intend to make a profit, even if they don’t make a profit.
Qualified businesses also include:
- Real property trades or businesses
- Farming businesses
- Companies that furnish or sell electrical energy, water, sewage, disposal services, gas or steam
- Patrons of horticultural or agricultural cooperatives
If you own a qualified business, you’re eligible for the QBI deduction regardless of your 2021 income amount. Calculate all applicable limitations to determine your final deduction amount.
If you have any questions about the QBI deduction – whether you qualify, whether you’re a specified service trade or business, etc. – connect with a tax professional.
Originally published 2/9/2019. Updated 5/12/2021.
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