Updated for tax year 2023.
You may qualify for the qualified business income deduction if you’re filing taxes when self-employed or a small business owner. The best part about QBI deduction? You don’t even have to do anything to take this tax deduction as long as your business income and the nature of your business make you eligible.
What is the qualified business income deduction?
The qualified business income deduction (also called the 199A deduction) is available to small business owners and self-employed people. The IRS allows you to deduct up to 20% of your qualified business income if you qualify.
The term “199A” comes from the Tax Cuts and Jobs Act because this deduction is addressed in Section 199A.
What is the purpose of the QBI deduction?
Taking the QBI deduction can help you save on taxes by significantly reducing your overall tax burden.
What business types qualify for QBI?
The QBI deduction is available to individuals who report business income on their personal return.
Business income includes income from sole proprietorships, limited liability companies, partnerships, S corporations and certain trusts and estates.
What income is not included in the QBI deduction?
C corporation income or income earned as wages is not eligible for the qualified business income deduction.
How can I claim the qualified business income deduction?
You can use IRS Form 8995 to help you figure your qualified business income deduction. TaxAct® can help you with this if you file your small business taxes using our tax preparation software.
How do I know if I qualify for the qualified business income deduction?
To qualify for the QBI deduction in tax year 2023, your total taxable income must be less than:
- $182,100 for single filers in 2023
- $364,200 for joint filers in 2023
If your income is over these thresholds, you may still be able to claim the qualified business income deduction, but it depends on your business type. We’ll go over that below.
What counts as qualified business income?
According to the IRS, “QBI is the net amount of qualified items of income, gain, deduction, and loss from any qualified trade or business.”
QBI deduction items include:
- The deductible part of self-employment tax (SE tax)
- Self-employed health insurance,
- Deductions for contributions to qualified retirement plans such as SEP IRAs and SIMPLE IRAs
- Unreimbursed partnership expenses
- Business interest expense
What doesn’t count as qualified business income?
The following are examples of income that does not qualify for QBI:
- Capital gains and losses
- Dividends and payments instead of dividends
- Interest income
- Wage income
- Income earned outside the U.S.
- Reasonable compensation from an S Corp
- Guaranteed payments from a partnership
These are just a few examples. The IRS has a more extensive list of what is not included in QBI.
How does the qualified business income deduction work?
You can claim the qualified business income deduction in addition to the standard deduction or your itemized deductions.
While this tax deduction is worth up to 20% of your qualified taxable business income, it cannot exceed 20% of your total taxable income.
To claim the qualified business income deduction as a sole proprietor, you must calculate your business income and expenses on Schedule C and your adjusted gross income on Form 1040 as usual. After that, you can start to calculate the qualified business expense deduction.
I’m over the income limit. How do I know if I qualify for QBI?
If your business is above the income threshold for QBI, the deduction depends on the nature of your business and whether you are a specified service trade or business (SSTB).
The IRS defines an SSTB as businesses involving the following:
- Health
- Law
- Actuarial science
- Performing arts
- Consulting
- Accounting and financial services
- Investing and investment management
- Trading
- Dealing in certain assets
- Any trade or business whose primary asset depends on the reputation or skill of one or more of the company’s owners or employees
As an SSTB, you can still qualify for the deduction in 2023 if your income is between $182,100 and $232,100 if you are single and $364,200 and $464,200 if you are married filing jointly. After those thresholds, SSTBs cannot qualify for the tax break. Non-SSTBs can still be eligible.
If your business falls within the income thresholds listed above, the IRS has some tests to determine if you can still claim the qualified business income deduction. The deduction amount is calculated based on the wages paid to yourself and your employees and the value of property owned by your business. The higher these amounts are, the more likely you could qualify for the QBI tax break.
QBI can get confusing once you’re above these income thresholds, but the IRS has a detailed FAQ page to help you figure out if you qualify.
How can I maximize the qualified business income deduction?
The best way to maximize your qualified business income deduction is to keep your income under the thresholds ($182,100 for for single filers and $364,200 for joint filers in 2023). This way, the nature of your business will not matter, and the deduction will be more straightforward.
If your income exceeds the limit, consider making additional contributions to your retirement accounts, deferring income, or accelerating your deductions (meaning spending money on deductible expenses now rather than waiting until the next tax year).
