Qualified Business Income Deduction: Who Qualifies?

QBI, also known as qualified business income deduction is a form of tax deduction that allows business owners and qualified self-employed people to deduct as much as 20% out of their eligible business income from their taxes. 

The entire taxable income for 2020 for single filers will be below $163,300; $326,600 for couples filing jointly. In 2021, single filers will have the limit at $164,900, while the value doubles for joint filers. 

People above that rule will have to go by IRS rules to determine whether their business income will qualify for a partial or full deduction. 

This article explains how the QBI deduction works:

Qualified Business Income Deduction: Who Qualifies?

This is for taxpayers that have "pass-through income." This means that your business income is reported in your tax return. The following qualify for QBI:

• Sole proprietors.

• S corporations.

• Partnerships.

• (LLC) Limited liability companies

There Must be "Qualified Business Income."

By definition, QBI has to do with business income that qualifies. We define qualified business income as net value of qualified items of gain, income, loss, and deduction from a particular business or trade. This implies your net business profit even though it excludes some of your business income as well.

The following are excluded from QBI:

• Interest income 

• Dividends

• The income you got from outside the US.

The level of your income Matters 

Assuming your entire taxable income (the business income with other income) is equal to or less than $163,000 for single (double value for people filing joint), you might be eligible for the deduction (20%) on the business income. This limit is set at $164,900 for a single taxpayer (double value for joint).

For people with income above these thresholds, their ability to be eligible for pass-through deduction is a factor of the business's exact nature. For a company that qualifies, one might not be able to have access to the entire tax break of 20% since this QBI deduction is reduced for some business. 

What if you are above the Income Limit?

For people that are above the income limit, there are some tests with which one can know whether they qualify for the QBI deduction. An example of such a test is the: "Is your business a specified service business or trade?"

People who are lawyers, actors, consultants, financial planners, etc. are classified as "specialized service business or trade," and a lot of people who earn big in this field might not qualify for the tax break since it phases out when the entire taxable income gets to $213,000 for single filers. (double value for married filing jointly) 

Testing for Pass-through Businesses That are Above the Income Limit

• In 2020, a business that is a specified service business or trade with an income (as a single filer) from $163,300 to $213,300; or joint filers having income from $326,600 to $426,600 will have some tests to know if it is possible to claim the QBI deduction. If it is possible, they also need to know if it can be reduced. 

• This argument is valid for a business with a pass-through income that is not classified as a "specified business or trade." Also, with some tests, one can determine how much of the deduction to claim

• The value of your deduction depends on an estimation that hinges on the amount of wages paid to the employees (with you inclusive), alongside the property value that your business owns. If the figures are high, you have a good chance of qualification for the deduction.

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