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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 2020 must be under $163,300 for single filers or $326,600 for joint filers to qualify. In 2021, the limits rise to $164,900 for single filers and $329,800 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.
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:
The qualified business income deduction by definition applies to "qualified business income," or QBI. Qualified business income is defined as "the net amount of qualified items of income, gain, deduction and loss with respect to any trade or business." Broadly speaking, that means your business's net profit.
But it also means that not all business income qualifies. QBI excludes:
If your total taxable income — that is, not just your business income but other income as well — is at or below $163,300 for single filers or $326,600 for joint filers, then in 2020 you may qualify for the 20% deduction on your taxable business income. In 2021, the limits rise to $164,900 for single filers and $329,800 for joint filers.
But if your income is above these limits, now’s the time to reach for a bottle of aspirin.
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, 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, actor, financial planner — — then your business is deemed a “specified service trade or business,” and many high earners in these fields won’t qualify for this tax break, because it disappears once you hit total taxable income of $213,300 if you’re single, and $426,600 if you’re married filing jointly.
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 , as normal. And you figure your 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 .)