02.28 2021

The Deduction for Qualified Business Income

The primary goal for the 2017 Tax Cuts and Job Act (TCJA) reform bill was to lower the Federal Income tax rate for C corporations. It reduced the corporate income tax rate to 21 percent, and Congress included a new bill called the Qualified Business Deduction (QBI) -IRC Section 199 , which applies to non-corporate taxpayers.

At the most basic level, Section 199A permits an individual to deduct 20 percent of his/her qualified business income generated through a sole proprietorship, a partnership, or S corporation. The deduction for qualified business income is the lesser of:

  1. 20 % of QBI
  2. 20 % of modified taxable income

In order to understand how to apply this deduction to your personal taxes, we have defined some important terms below.

Definition of Qualified Business Income (QBI)
QBI is defined as the ordinary income less ordinary deductions a taxpayer earns from “qualified trade or business” conducted. *Each partnership or S corporation can include the distributive share of interest held by the taxpayer.

QBI does not include some income from investment:
– Capital gains or losses
– Dividends
– Interest income
– Certain other investment items

Definition of Qualified Trade or Business (QTB)
In general, QTB includes any trade or business other than providing services as an employee. Sole proprietors, non-corporate owners of S corporations, Partnerships, and LLCs, and independent contractors are covered by this deduction.

If you’d like to learn more about this deduction, visit the IRS website: Qualified Business Income Deduction