What Is Qualified Business Income (QBI)?

Are you a business owner or a self-employed individual looking to maximize your tax savings? If so, you’ve likely heard about Qualified Business Income (QBI).

If you are unsure exactly what it entails, just know one thing: it helps you keep more of your hard-earned money in your pocket! 

While it’s worth understanding the QBI deduction, it’s best to leave all the heavy lifting to the pros at doola Bookkeeping.

However, we’re more than just a bookkeeping solution. Our all-in-one tax management solution can help you minimize your tax liability and improve your administrative operations. 

But first, let’s understand QBI by breaking down its definition, its significance for different types of businesses, and how you can leverage it to boost your bottom line. 

What Is Qualified Business Income?

Qualified business income is the net amount of profit pass-through business owners have earned from their business, with a few exclusions:

• Income generated outside the United States

• Income from investments

• W-2 compensation paid to an S corporation owner

• Guaranteed payments to a partner

• Income from REITs, publicly traded partnerships, and qualified cooperatives

To answer your question “What Is Qualified Business Income?”, in simple terms, QBI refers to the net income from a qualified business or trade that is eligible for QBI deduction. 

It allows owners of pass-through businesses, such as sole proprietorships, partnerships, LLCs (limited liability companies), and S corporations, to claim a 20% tax deduction in their individual tax returns.

This means that if you have earned $100,000 as pass-through income from your LLC, you may claim a $20,000 deduction, thus reducing your taxable personal income. 

Note: Unless extended by Congress, the QBI deduction will expire on December 31, 2025.

Who Qualifies for the QBI Deduction?

The QBI deduction is only available to owners of pass-through businesses, but the limitations don’t end there.

The deduction amount depends on the taxpayer’s total taxable income, which includes wages, interest, capital gains, and business income. 

However, if the taxable income reaches or exceeds $200,000 ($400,000 if filing jointly), the type of business also comes into play.

For example, your QBI deduction may be reduced or disappear entirely if you own a specified service trade or business (SSTB) and your total taxable income reaches a certain limit.

The taxable income limits for 2025 are:

How the Qualified Business Income Deduction Works

You can claim the QBID regardless of whether you take the standard deduction or itemize your deductions. However, QBID is capped at 20% of your total taxable income, which means it cannot exceed that amount.

You can claim the qualified business income deduction even if you don’t itemize. This means you can use the standard deduction method to become eligible for this deduction.

To calculate your pass-through deduction, you’ll need to determine your business income and expenses on Schedule C and your adjusted gross income (AGI) on Form 1040.

Once you have your business income, expenses, and AGI figured out, you can start calculating your pass-through deduction.

How to Calculate QBI for Your Business

Since there are so many factors affecting its calculation, QBI deduction gets complex fast. That’s why we have brought you a step-by-step guide to help you figure out whether it applies to your business and how to calculate it.

Step 1: Determine Your Eligibility

The first step is to determine if you qualify for this deduction. Check the IRS Qualified Business Income FAQs to learn which kinds of businesses qualify.

Step 2: Calculate Your Total Business Income

The next step is to calculate your eligible business income from each qualified business activity during the taxable year.

Step 3: Consider Limitations on Your Deductions

There may be limitations on how much deduction you can take based on your business type, filing status, and income level.

• Income < $200,000: You can take the full 20 percent QBI deduction regardless of the type of business.

• SSTB Income =>$250,000: Your income is too high to claim a QBI deduction.

• Income $200,000 – $250,000: You can claim the full 20 percent deduction.

• SSTB Income $200,000 – $250,000: You can continue to the next step to calculate your QBI deduction after limitations.

Step 4: Calculate Your QBI Deduction

To calculate this deduction, use the worksheets in Form 1040 Instructions and IRS Publication 535. 

• Use Form 1040 if your taxable income isn’t more than $200,000 as an individual and $400,000 if filing jointly. 

• Use the Publication 535 if your taxable income is higher than the threshold amount.

This is where things get a little complicated!

Consult with a tax professional who can help you navigate through any limitations or exceptions that may apply to your business and ensure accurate reporting on your tax return.

Common Deductions That Reduce QBI

While OBI deduction can be a significant benefit for business owners, some other deductions may affect your QBI deduction amount. 

Capital Losses: These losses can then be deducted from any capital gains made during the same year. However, if the net amount of losses exceeds gains, it can also be deducted from QBI in certain circumstances. 

Self-employment Taxes: Similar to capital losses, self-employment taxes must also be considered when calculating the total QBI deduction amount.

Health insurance premiums: If you own a pass-through entity, you may deduct your health insurance premiums, which will ultimately reduce your qualified business income subject to taxation.

Retirement Contributions: Payments made towards retirement plans such as IRAs or 401(k)s will also lower your total taxable income, which in turn reduces your eligible QBI amount.

What to Avoid When Claiming QBI

When it comes to claiming Qualified Business Income (QBI), there are some factors that can affect the validity and accuracy of your QBI deductions, resulting in under-reported income.

Here are some common pitfalls to avoid when claiming QBI:

🚩 Not Keeping Accurate and Organized Records: Failing to keep proper records can lead to incorrect calculations and possibly trigger an IRS audit.

🚩 Confusing Between Personal and Business Expenses: Mixing personal and business expenses could result in improper deductions, leading to penalties or even fraud charges.

🚩 Misclassification of Employees or Independent Contractors: This can have significant implications for both you and your workers, including missed tax payments, back taxes, fines, interest charges, etc., which could ultimately affect your QBI calculation.

🚩 Taking Unreasonable Deductions: Any unreasonable claims will raise red flags during audits and possibly trigger penalties for fraudulent reporting.

Maximize Your QBI Deductions With doola Bookkeeping

Navigating through all the rules and regulations around QBI deduction can be overwhelming for many small business owners. That’s where doola Bookkeeping comes in. 

Our end-to-end bookkeeping and tax management software can help you automate expense tracking, transaction categorization, and tax filing. 

From organizing all deductible expenses to calculating the final deduction amount, our software simplifies this mind-bending process.

Also, our team of experienced tax professionals is readily available to assist you in maximizing your current year’s deductions and reap the full benefits of QBI throughout your business’s lifespan.

Book a demo with us so you can rest assured that your QBI deductions will be optimized to their fullest potential.

FAQs

How does QBI impact my taxes?

If you have QBI-eligible income from your business, you can deduct up to 20% of your total taxable income from that business on your personal tax return.

Are there any limitations or restrictions on claiming QBI?

Yes, there are certain limitations and restrictions on claiming QBI deductions. For example, if your taxable income exceeds $400,000 (or $500,000 for married couples filing jointly), the amount of your deductible QBI may be limited.

Do rental properties qualify for QBI deductions?

Rental properties can be considered a qualified business under certain circumstances if they are being considered active trade or business rather than passive investments.

Which taxes can be reduced by QBI deduction?

QBI deductions are taken on your tax return, so they won’t change the amount you owe for self-employment tax, nor does it affect payroll taxes or state and local taxes.