Qualified Business Income (QBI)

Question 1

QBI:

Which act added QBI to the IRS revenue code?

Answer 1

The Tax Cuts and Jobs Act (TCJA) of 2017

Question 2

QBI:

What does the QBI deduction allow?

Answer 2

Allows up to a 20% deduction on the qualified business income (QBI) of noncorporate taxpayers.

Question 3

QBI:

How long with QBI deduction last?

Answer 3

• Under the TCJA of 2017, the deduction for qualified business income is temporary.
• It is in effect from 2018 through 2025.

Question 4

QBI:

(1) What is the QBI deduction and (2) how is it calculated?

Answer 4

(1) The deduction for qualified business income is 20% of qualified business income (QBI) generated through a sole proprietorship, a partnership, or an S corporation.

(2) In general, the deduction for qualified business income is the lesser of:
• 20% of qualified business income (QBI), or
• 20% of modified taxable income.

Question 5

QBI:

What is ‘modified taxable income’?

Answer 5

Modified taxable income is taxable income before the deduction for QBI, reduced by any net capital gain.

Question 6

QBI:

What is included in “net capital gain” use to calculate “modified taxable income”?

Answer 6

Term net capital gain includes both:
• Excess of a long-term capital gain over a short-term capital loss, plus
• Any qualified dividend income.

Question 7

QBI:

What is the definition of Qualified Business Income?

Answer 7

QBI is defined as the ordinary income less ordinary deductions a taxpayer earns from a “qualified trade or business” conducted in the United States by the taxpayer.

Question 8

QBI:

Does Qualified Business Income include capital gains or capital losses?

Answer 8

No!

Question 9

QBI:

Does Qualified Business Income include dividend income?

Answer 9

No!

Question 10

QBI Deduction Example:

Ted, a married sole proprietor, has $210,000 of qualified business income and a modified taxable income of $250,000.

What is his QBI deduction and final taxable income?

Answer 10

• QBI deduction is the lesser of:
• 20% of qualified business income = $210,000 x 20% = $42,000
• 20% of modified taxable income = $250,000 x 20% = $50,000
• Final taxable income is:
• $250,000 modified taxable income - $42,000 QBI deduction = $208,000

Question 11

QBI:

What is the definition of a “Qualified Trade or Business”?

Answer 11

Includes any trade or business other than providing services as an employee.

Question 12

QBI:

How does the QBI deduction calculation work for taxpayers with multiple businesses?

Answer 12

• The deduction for qualified business income must be determined separately for each qualified trade or business.
• These independent calculations are then combined becoming the “combined qualified business income amount.”
• This combined amount is then compared to the overall modified taxable income limit.

Question 13

QBI: Limitations

If a business is labor-intensive, what is the maximum QBI deduction?

Answer 13

50% of the W−2 wages paid by the business will likely be the relevant limit on the QBI deduction.

Question 14

QBI: Limitations

If a business is capital-intensive, what is the maximum QBI deduction?

Answer 14

• Begins with 25% of W–2 wages paid by the QTB and adds to this amount 2.5% unadjusted basis of the of qualified property.
• Qualified property includes depreciable tangible property-real or personal- that is used by the QTB during the year and whose depreciable period has not ended before the end of the taxable year.
• Land and intangible assets are not qualified property

Question 15

QBI: Limitations

If the QBI deduction is less than threshold levels, what happens?

Answer 15

The QBI deduction does not apply.