QBI Qualified Business Income

What is the Qualified Business Income Deduction?

The section 199A qualified business income (QBI) deduction was introduced by the Tax Cuts and Jobs Act of 2017. While the TCJA cut the C-corporation tax rate to 21 percent, the QBI deduction lets taxpayers deduct qualifying income connected to certain passthrough entities:

  • 20 percent of net qualified business income plus 20 percent of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income

If the amount of qualifying net business income exceeds the threshold for a given tax year, it may be limited by a number of factors, like the type of business income being claimed, how much the taxpayer paid in W-2 wages, and business-owned capital property.

Specified service trades and businesses generally do not qualify for QBI unless the income derived from them is below a certain threshold.

Taxpayers who receive qualified business income from more than one qualified trade or business generally calculate QBI for each business separately. However, they can choose to aggregate those trades and businesses if they meet certain requirements.

What types of business income qualify for the QBI deduction?

Taxpayers who have taxable income that is connected to the following types of businesses may qualify for QBI:

  • Sole proprietorship
  • Partnership (as a partner)
  • S corporation (as a shareholder)
  • Trust or estate (as a beneficiary)
  • Farms
  • Certain rental properties

Income from a specified service trade or business may also qualify if it is below a certain threshold.

What is the QBI rental real estate safe harbor rule?

Taxpayers who derive income from a rental real estate enterprise and meet the following requirements may claim the QBI safe harbor outlined in Rev. Proc. 2019-38Rev. Proc. 2019-38:

  • Separate books and records are maintained to reflect income and expenses for each rental real estate enterprise.
  • For rental real estate enterprises that have been in existence less than four years, 250 or more hours of rental services are performed per year. For other rental real estate enterprises, 250 or more hours of rental services are performed in at least three of the past five years.
  • The taxpayer maintains contemporaneous records, including time reports, logs, or similar documents, regarding the following: hours of all services performed; description of all services performed; dates on which such services were performed; and who performed the services.
  • The taxpayer or RPE attaches a statement to the return filed for the tax year(s) the safe harbor is relied upon.

Additional information about the QBI safe harbor rule can be found in IR-2019-158 and the IRS.gov Tax Reform page.

How is QBI determined?

The 20 percent QBI deduction is based on qualifying business income from a sole proprietorship, partnership, S corporation, trust or estate, farm, and certain rental property. The amount of the deduction can be further limited if the taxpayer’s income exceeds the inflation-adjusted threshold established for that tax year.While normally figured on Form 1040, the IRS has two forms to help taxpayers calculate QBI:

  • Form 8995, Qualified Business Income Deduction Simplified Computation
  • Form 8995-A, Qualified Business Income Deduction

The instructions for Forms 8995 and 8995-A explain who can claim the deduction, how to determine qualifying businesses and income, specific exclusions, and more.

What is a specified service trade or business (SSTB)?

Businesses or trades involved in the following service fields are considered a specified service trade or business for the purposes of claiming the QBI deduction:

  • Health
  • Law
  • Accounting
  • Actuarial science
  • Performing arts
  • Consulting
  • Athletics
  • Financial services
  • Brokerage services
  • Investing and investment management
  • Trading or dealing in securities
  • Partnership interests
  • Commodities

The IRS also identifies “any trade or business … [wherein] the principal asset is the reputation or skill of one or more of its employees or owners” as an SSTB in the instructions for Form 8995, Qualified Business Income Deduction Simplified Computation.

A taxpayer receiving income from an SSTB may claim all or a portion of QBI if that income is below the taxable income threshold or falls within the SSTB phase-in threshold range.

What is the taxable income QBI threshold for 2020?

There are two income thresholds for claiming QBI in tax year 2020:

  • $163,300 for single taxpayers, heads of household, qualifying widows and widowers, or trusts and estates
  • $326,600 for married couples filing jointly

What is the taxable income QBI threshold for 2019?

There are two income thresholds for claiming QBI in tax year 2019:

  • $160,725 for single taxpayers, heads of household, qualifying widows and widowers, or trusts and estates
  • $321,400 for married couples filing jointly

What is the taxable income QBI threshold for 2018?

There are two income thresholds for claiming QBI in tax year 2018:

  • $157,500 for single taxpayers, heads of household, qualifying widows and widowers, or trusts and estates
  • $315,000 for married couples filing jointly