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What is the qualified business income deduction?
The qualified business income deduction (QBI) is a tax deduction that allows eligible self-employed and small-business owners to deduct up to 20% of their qualified business income on their taxes.
In general, total taxable income in 2023 must be under $182,100 for single filers or $364,200 for joint filers to qualify. In 2024, the limits rise to $191,950 for single filers and $383,900 for joint filers.
If you’re over that limit, complicated IRS rules determine whether your business income qualifies for a full or partial deduction. Here's how the qualified business income deduction generally works.
Who qualifies for the qualified business income deduction?
The qualified business income deduction is for people who have “pass-through income” — that’s business income that you report on your personal tax return. Entities eligible for the qualified business income deduction include:
Limited liability companies (LLCs).
What is "qualified business income"?
The qualified business income deduction by definition applies to "qualified business income" (QBI). Qualified business income is defined as "the net amount of qualified items of income, gain, deduction, and loss from any qualified trade or business”. Broadly speaking, that means your business's net profit.
But it also means that not all business income qualifies. QBI excludes:
Income earned outside the U.S.
Certain wage and guaranteed payments made to partners and shareholders.
How to qualify for the QBI deduction
If your total taxable income — that is, not just your business income but other income as well — is at or below $182,100 for single filers or $364,200 for joint filers in 2023 you may qualify for the 20% deduction on your taxable business income. In 2024, the limits rise to $191,950 for single filers and $383,900 for joint filers.
But if your income is above these limits, that’s when the headache really kicks in.
Here’s why: Above those income limits, your ability to claim the pass-through deduction depends on the precise nature of your business. And even if your business qualifies, there’s a chance you won’t get to enjoy the full 20% tax break, as the qualified business income deduction is phased out for some businesses.
If you’re over the income limit
If you’re over the income limit, there are a few tests that determine whether you qualify for the qualified business income deduction. One such test is this: Is your business a “specified service trade or business"? If you’re a doctor, lawyer, consultant, financial planner or an actor — and the list goes on — then your business is deemed a “specified service trade or business”. Many high earners in these fields won’t qualify for this tax break, because in 2023, it disappears once you hit a total taxable income of $232,100 if you’re single, and $464,200 if you’re married filing jointly. For 2024, the limits are $241,950 and $483,900, respectively.
Tests for pass-through businesses over the income limit:
If your business is a “specified service trade or business” in 2023 and your income is from $182,100 to $232,100 (single filers) or from $364,200 to $464,200 (joint filers), there are some tests to determine whether you can claim the qualified business income deduction, and, if so, whether it’ll be reduced. In 2024, these figures rise to $191,950 to $241,950 (single filers) and $383,900 to $483,900 (joint filers).
The same goes if you own a business with pass-through income that’s not a “specified trade or business”: There are tests that determine how much you can claim of the deduction.
Specifically, the amount of your deduction is based on a calculation tied to the amount of wages you paid to employees (including yourself), as well as the value of the property the business owns. The higher those figures, the better your chances of being able to qualify for the deduction.
But it gets complicated, and fast. So if your tax situation falls into this area, now might be a good time to consult a tax professional. Or check out the IRS regulations for more details.
How the qualified business income deduction works
There are a couple of aspects of the pass-through deduction to keep in mind:
1. There are actually two 20% figures. The qualified business income deduction is worth up to 20% of your taxable business income. But it’s also true that when claiming this pass-through deduction, it can’t add up to more than 20% of your total taxable income.
Here’s how it works: You figure your business income and expenses on Schedule C, as normal. And you figure your adjusted gross income on Form 1040, as usual. Only after that do you start calculating this pass-through deduction.
2. You can claim the qualified business income deduction even if you don’t itemize. That is, if you use the standard deduction, this deduction is still available to you. (Here’s how much the standard deduction is worth this year.)