Qualified Business Income Deduction (QBI): Overview

The Qualified Business Income Credit (QBI) is a tax credit that allows eligible self-employed individuals and small business owners to deduct up to 20% of their qualified business income from their taxes.

Generally, to qualify, your total taxable income in 2023 must be less than $182,100 for single filers and $364,200 for joint filers. In 2024, the limit increases to $191,950 for a single filer and $383,900 for a joint filer.

If you exceed that limit, complex IRS rules determine whether your business income is fully or partially deductible. The general structure of the qualified business income deduction is as follows:

The qualified business income deduction is for people who have “pass-through income,” or business income that they report on their personal tax returns. The following entities are eligible for the qualified business income deduction:

• Limited Liability Company (LLC).

The Qualified Business Income deduction, by definition, applies to “qualified business income” (QBI). Qualified business income is defined as “the net amount of qualified items of income, gain, deduction, or loss derived from a qualified trade or business.”^[0]

But it also means that not all business income is eligible. QBI excludes:

20 of your taxable business income if your total taxable income (including business income as well as other income) in 2023 is less than or equal to $182,100 for single filers and $364,200 for joint filers. You may be eligible for a % deduction. In 2024, the limit increases to $191,950 for a single filer and $383,900 for a joint filer.

But if your income exceeds these limits, you'll run into some real headaches.

Here's why: Your ability to claim pass-through deductions above these income limits will depend on the exact nature of your business. And even if your business qualifies, you may not be able to take advantage of the full 20% tax reduction because some businesses are phasing out the Qualified Business Income deduction.

If you exceed the income limit, there are several tests to determine whether you qualify for the qualified business income deduction. One such test is this. Is your business a “specified service industry or business”? If you are a doctor, lawyer, consultant, financial planner, or actor, the list goes on, your business is considered a “specified service industry” . Trade or business?^[0]

Testing for pass-through businesses that exceed income limits:

• If your business is a “specified service or business” in 2023 and has income between $182,100 and $232,100 (single filers) or between $364,200 and $464,200 (joint filers), you can claim qualified business income. There are several tests to determine whether. The amount of the deduction and, if so, whether it is reduced. In 2024, those numbers rise from $191,950 to $241,950 (single filers) and $383,900 to $483,900 (joint filers).

• The same applies if you run a business with pass-through income that is not a “specified commercial transaction or specified business.” There is a test to determine the amount deductible.

• Specifically, the deduction is calculated based on the amount of wages you pay your employees (including yourself) and the value of the assets your business owns. The higher this number, the more likely you are to qualify for the deduction.

• But it gets complicated and fast. So, if your tax situation falls into this area, now may be a good time to consult a tax professional.Or check out IRS regulations For more information.

There are a few things to keep in mind regarding pass-through deductions.

1. There are actually two 20% numbers. The qualified business income deduction is worth up to 20% of your taxable business income. However, it is also true that if you claim this pass-through deduction, you cannot exceed 20% of your total taxable income.

Here's how it works: Calculate business income and expenses. Schedule C, As usual.and you understand yourself Adjusted gross income upon Form 1040, As usual. Only then will this pass-through deduction begin to be calculated.