Qualified Business Income Deduction
Updated: Apr 24
What is a Qualified Business income deduction?
QBI (Qualified business income deduction) which is also known as the Section 199A allows the owners of pass through business owners to write off up to 20% on their personal business income on their taxes. Pass through businesses may be entities like sole proprietorships, Limited liability companies, S corporations, trusts, estates etc. It is known as pass through by the way it is taxed. It is typically not an easy process to figure out whether an investor qualifies for the deduction as they have to oblige with a number of criteria provided by the IRS.
Eligibility for the claim
The law expects the investors to spend good amount of time running their business, so it might be best suited for the investors those who self manage a large portfolio. The investors might need to track down all their expenses eligible for the QBI as a separate record apart from other expenses. Investors who own investment properties for more than 4 years are supposed to spend at least 250 hours in maintaining their property. Maintaining their property might include talking to their tenants, screening their tenants, fixing repairs and maintaining their property like a property management. Investors who own investment properties for more than 4 years may be expected to have spent at least 250 hours for 3 years consecutively in the past 5 years. Each and every hour spent and the purpose must be logged on to show how the 250 hours are spent and maintained and may be needed to be attached with their tax return.
Businesses that qualify
Businesses that qualify for QBI are individuals, sole proprietorships, S corporation and it may also be influenced by some of the factors such as Income limits, Business type etc. There are some businesses that are eligible for the deduction partially and they are called as S.S.T.B - Specified Service Trade or Business. In 2021, if the total taxable income is less than $164,900 for single person or total taxable income is less than $329,800 if married filed jointly, then they may be eligible for the deduction if other factors like the business type also implies.
If the business is SSTB and the total taxable income ranges between $329,800 - $429,800 for married filing jointly or the the taxable income ranges between $164,900 - $214,900, the there may be a limit in the deduction. If the income is more than $329,800 (married filed jointly) and more than $164,900 (Single) earned from qualifying business, then the deductions may also be subject to W2 wages limitation or the W2 wages and the qualifying business limitation.
Some examples of qualified businesses eligible for the claim are
Qualified Pass through entities in which taxes are paid by the individual owners rather than paying income tax to the corporate.
Qualified PTP income including the partnership gains and losses.
Qualified Dividends of Real estate investment trusts.
Businesses that don't qualify
C Corporation does not qualify for QBI even though they are pass through entities because Qualified business income is for the individual tax payers and they usually pay corporate taxes. In 2021, if the business income is greater than $429,800 (married filing jointly) or $214,900 (single) and the business comes under Specified Service trade or business, then you cannot claim the deduction at all.
Some of the non eligible qualified business income are
Capital gains or losses
Unqualified Dividends of Real estate investment trusts.
Income earned outside U.S.
Rental investment where the tenant is under the Triple net lease that pays for the maintenance, repairs are not eligible for the deduction.
Possible rental services considered for QBI
Advertising for the rental or lease
Screening tenants for the lease
Negotiation and execution of the terms of the lease
Verifying information on the tenant's lease applications
Management of the property
Supervision of the employees
Repairs and maintenance of the property
Collecting rents and managing expenses of the rentals
Purchasing materials for the rentals.
Person A is married and works in a Specified Service Trade or Business and has 20,000 in qualifying income on a property and she meets the hours eligibility requirement for the qualified business income deduction. Let us consider three scenarios to know the calculation of QBI.
If Person A's total taxable income is less than $329,800, then they may be eligible for the Qualified Business income deduction.
If Person A's total taxable income is more than $329,800 but less than $429,800, then they may be eligible for the partial Qualified Business income deduction.
If Person A's total taxable income is more than $429,800, then they may not be eligible for the Qualified Business income deduction.