#The complicated art of deduction plus
Let’s start with a fictitious example so you can follow along. In this case, they’d get 20% of $30,000 for a $6,000 deduction.
Under $164,900 ($329,800 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.įor instance, a taxpayer with $30,000 of QBI, $100,000 in total taxable income, and $5,000 in capital gains would simply apply 20% to their QBI because it’s the lesser of the two amounts ($30,000 vs. At higher income levels, whether or not the business is an SSTB will also play a role. The deduction depends on the taxpayer’s total taxable income, which includes wages, interest, capital gains, etc. We’ve laid out the details below, but don’t worry if you find yourself getting lost - TurboTax easily handles the new QBI deduction and will let you know if you qualify and how much of a deduction you’re getting. For many TurboTax customers, the calculation is very simple, while for others…not so much. Wondering if your line of work is considered an SSTB? Read more here. If an interest in real estate fails to satisfy all the requirements of the safe harbor, it may still be treated as a trade or business for purposes of the deduction if it otherwise meets the definition of a trade or business. If all the safe harbor requirements are met, an interest in rental real estate will be treated as a single trade or business for purposes of the deduction. Starting in 2019, the IRS issued Revenue Procedure 2019-38 that has a safe harbor allowing certain interests in rental real estate, including interests in mixed-use property, to be treated as a trade or business for purposes of the qualified business income deduction. Rental real estate qualifying as a business for the QBI deduction Brokerage services (including investment management and investing, trading, or dealing in securities, commodities, or partnership interests)Įngineering and architecture were specifically excluded from the SSTB definition as it relates to this new deduction.At higher income levels, the deduction for SSTBs is reduced and in some cases, eliminated.įor the purposes of the QBI deduction, an SSTB is defined as any trade or business that performs services in the fields of: The specified service trade or business (SSTB) classification doesn’t come into play as long as total taxable income is under $164,900 ($329,800 if filing jointly).
The calculations also get quite complicated, but TurboTax easily handles them and will figure out how much of a deduction you’re entitled to. Once the taxable income reaches or exceeds $164,900 ($329,800 if filing jointly), the type of business also comes into play.Īt incomes below that level, the deduction is 20% of either taxable income (minus capital gains and dividends) or the QBI, whichever is less.Īt higher income levels, the deduction is reduced or eliminated, depending on the nature of the business. The deduction amount depends on the taxpayer's total taxable income, which includes wages, interest, capital gains (etc.) in addition to income generated by the business.
With the QBI deduction, most self-employed taxpayers and small business owners can exclude up to 20% of their qualified business income from federal income tax (but not self-employment tax) whether they itemize or not. The Qualified Business Income deduction (also called the QBI deduction, pass-through deduction, or section 199A deduction) was created by the 2017 Tax Cuts and Jobs Act (TCJA) and is in effect for tax years 2018 through 2025. (Surprised that you're getting the QBI deduction? Here's what might be going on.