qualified business income deduction Many
owners of sole proprietorships, partnerships, S corporations and some
trusts and estates may be eligible for a qualified business income (QBI)
deduction – also called Section 199A – for tax years beginning after
December 31, 2017. The deduction allows eligible taxpayers to deduct up
to 20 percent of their qualified business income (QBI), plus 20 percent
of qualified real estate investment trust (REIT) dividends and qualified
publicly traded partnership (PTP) income. Income earned through a C
corporation or by providing services as an employee is not eligible for
the deduction. For more information on what qualifies as a trade or
business, see Determining your qualified trades or businesses in
Publication 535.
The deduction is available, regardless of whether taxpayers itemize deductions on Schedule A or take the standard deduction. Eligible taxpayers can claim it for the first time on the 2018 federal income tax return they file in 2019.
The deduction has two components.
QBI is the net amount of qualified items of income, gain, deduction and loss from any qualified trade or business, including income from partnerships, S corporations, sole proprietorships, and certain trusts. Generally this includes, but is not limited to, the deductible part of self-employment tax, self-employed health insurance, and deductions for contributions to qualified retirement plans (e.g. SEP, SIMPLE and qualified plan deductions).
QBI does not include items such as:
Rental real estate that does not meet the requirements of the safe harbor may still be treated as a trade or business for purposes of the QBI deduction if it is a section 162 trade or business.
The deduction is available, regardless of whether taxpayers itemize deductions on Schedule A or take the standard deduction. Eligible taxpayers can claim it for the first time on the 2018 federal income tax return they file in 2019.
The deduction has two components.
- QBI Component. This component of the deduction equals 20 percent
of QBI from a domestic business operated as a sole proprietorship or
through a partnership, S corporation, trust or estate. The QBI Component
is subject to limitations, depending on the taxpayer’s taxable income,
that may include the type of trade or business, the amount of W-2 wages
paid by the qualified trade or business and the unadjusted basis
immediately after acquisition (UBIA) of qualified property held by the
trade or business. It may also be reduced by the patron reduction if the
taxpayer is a patron of an agricultural or horticultural cooperative.
- REIT/PTP Component. This component of the deduction equals 20 percent of qualified REIT dividends and qualified PTP income. This component is not limited by W-2 wages or the UBIA of qualified property. Depending on the taxpayer’s taxable income, the amount of PTP income that qualifies may be limited depending on the PTP’s trade or business.
QBI is the net amount of qualified items of income, gain, deduction and loss from any qualified trade or business, including income from partnerships, S corporations, sole proprietorships, and certain trusts. Generally this includes, but is not limited to, the deductible part of self-employment tax, self-employed health insurance, and deductions for contributions to qualified retirement plans (e.g. SEP, SIMPLE and qualified plan deductions).
QBI does not include items such as:
- Items that are not properly includable in taxable income
- Investment items such as capital gains or losses or dividends
- Interest income not properly allocable to a trade or business
- Wage income
- Income that is not effectively connected with the conduct of business within the United States
- Commodities transactions or foreign currency gains or losses
- Certain dividends and payments in lieu of dividends
- Income, loss, or deductions from notional principal contracts
- Annuities, unless received in connection with the trade or business
- Amounts received as reasonable compensation from an S corporation
- Amounts received as guaranteed payments from a partnership
- Payments received by a partner for services other than in a capacity as a partner
- Qualified REIT dividends
- PTP income
Rental real estate that does not meet the requirements of the safe harbor may still be treated as a trade or business for purposes of the QBI deduction if it is a section 162 trade or business.
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