How To Get the Qualified Business Income Deduction (QBI)

If you're a small business owner, you may qualify to claim the QBI deduction

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The qualified business income deduction (QBI) gives small business owners an additional 20% tax deduction on their net business income, which helps reduce their total taxable income. To get the qualified business income deduction, your business can't be a C corporation and you must pay business taxes on your personal tax return. Not all types of income count toward the calculation for the QBI deduction, but most of your business's net income from business operations will qualify.

If your small business meets all of the qualifications for the QBI deduction, you can take this deduction on your personal tax return—here's how.

Key Takeaways

  • The qualified business income deduction (QBI) deduction is for business owners. The deduction is worth up to 20% of qualified net business income.
  • The deduction can be taken in addition to the normally allowable business expense deductions.
  • Small business owners who pay business taxes on their personal tax returns can take this deduction, but it doesn't apply to C corporations.

What Is Qualified Business Income?

Qualified business income includes specific qualified income, gains or losses, and deductions from business income. Only items included in taxable income are counted and income earned through a C corporation is not eligible.

Specific types of income must be removed from the calculation for the QBI deduction. You can count most of your business's net income from business operations.

Qualified business income does not include the following types of income:

  • Capital gains, losses, or dividends from investments
  • Wage income
  • Interest income or annuities that is not associated with the business
  • Qualified real estate investment trust (REIT) dividends
  • Qualified publicly traded partnerships (PTP) income
  • Business income from outside the U.S.
  • Guaranteed payments to a partner

Qualified REIT dividends and PTP income are separate from the rest of your qualified business income. The IRS offers more specific information on its site. Other less common types of income may not be included in income for the QBI calculation. The Instructions for Form 8995 may be able to help.

The QBI deduction may also be limited by the wages or salary paid to employees and the cost of some property owned and recently purchased by the business, called “unadjusted basis immediately after acquisition (UBIA).”

Note

Although QBI eligibility is for business income, the deduction is for business owners, not the business. The total taxable income of the owner from all sources is counted in determining eligibility for this deduction.

The qualified business income deduction (QBI) allows small business owners to take a 20% deduction based on the net income of their business, in addition to regular business deductions. The details of this deduction are in section 199A of the tax code, which is why the deduction is sometimes called a 199A deduction.

Which Business Types Can Claim the QBI Deduction?

Several factors determine whether you qualify for this tax deduction:

  • Your business must be a sole proprietorship, partnership, or S corporation
  • You need to know the amount of net income from that business for the year, to see what income and deductions are qualified and which don't qualify
  • You must calculate your total taxable income from all sources for the year

Basically, only pass-through businesses can take this deduction. In pass-through businesses, the income from the business is taxed on the owner’s personal tax return.

Pass-through businesses are:

  • Sole-proprietors and single-owner limited liability companies (LLCs) filing federal income taxes on Schedule C
  • Partners in partnerships and multiple-member LLC owners filing partnership returns
  • S corporation shareholders filing Schedule K-1 to report their share of S corporation income

Note

Corporations (C corps) are not eligible for the QBI deduction because the corporation’s income is taxed separately from that of the owner.

Specified Services Trades or Businesses (SSTBs)

Some types of businesses, called specified services trades or businesses (SSTBs), may not be eligible for the entire QBI deduction if the income of the owners is above certain limits, which change every year. These SSTBs include businesses involving the performance of services based on the reputation or skill of employees or owners (think: health care, law, accounting, performing arts, consulting, athletics, financial services, and investing).

How To Claim the QBI Deduction on Your Tax Return

The QBI deduction is calculated on one of two forms, depending on the amount of your taxable income.

Form 8995 is the simplified computation form. You can use this form if your taxable income is not greater than $170,050 and you're a single filer, married filing separately, head of household, or widow(er) for tax year 2022. The income limit is $340,100 if you're married filing jointly.

Form 8995-A is for more complicated situations, including SSTBs and owners of multiple businesses.

Partners and S Corporation Owners

S corporation owners and partners (including owners of LLCs taxed as partnerships) calculate the QBI deduction differently. First, the total QBI for the business is calculated on one of the two forms above. Then, each owner’s share of the QBI is calculated and entered in a separate line on the owner’s Schedule K-1, along with other income of the owner. The information on Schedule K-1 is entered with the owner’s other income on the owner’s personal tax return.

Note

The calculation for this deduction is complicated and it’s different for each specific business. To find out if you qualify and to get help with the calculation, use tax preparation software or the services of a licensed tax professional.

Frequently Asked Questions (FAQs)

How is the qualified business income deduction calculated?

To calculate the qualified business income (QBI) deduction, you must complete your personal tax return and calculate the net income from your business. Some non-qualified types of income must be subtracted from net income. You can use the QBI Flow Chart in the Instructions for Form 8995 to see how the order of calculations works.

Can you claim qualified business income deductions on your rental property?

Owners of real estate rental properties may be eligible for the qualified business income (QBI) deduction if they meet certain specific requirements to be considered a "trade or business." You don't have to materially participate in the activity of renting real estate to qualify.

Each situation is reviewed based on all the facts and circumstances. If you want to take the QBI deduction for your real estate business, check with a licensed tax professional.

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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. IRS. "Qualified Business Income Deduction."

  2. IRS. "Instructions for Form 8995."

  3. IRS. "Publication 535, Business Expenses."

  4. IRS. "Instructions for Form 8995 Qualified Business Income Deduction Simplified Computation."

  5. IRS. "About Form 1120-S, U.S. Income Tax Return for an S Corporation."

  6. IRS. "Tax Cuts and Jobs Act, Provision 11011 Section 199A - Qualified Business Income Deduction FAQs."

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