What Is The QBI Deduction and Do I Qualify?

poppybookkeeping
May 11, 2021
3 min read

For small businesses the QBI Deduction can reduce your federal income tax and save you money but it can also be a head scratcher to figure out. I have created a flowchart below to help you navigate this deduction. The figures are based on 2020 so this year's numbers will be slightly higher than the one's shown. But first, a few things to know:

This Is What the IRS defines as Qualified Business Income:

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. These includable items must be effectively connected with the conduct of a trade or business within the United States. Count only items in taxable income. Generally, in computing QBI, account for any deduction attributable to the trade or business. 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 (such as SEP, SIMPLE and qualified plan deductions).

QBI doesn't include any of the following.

Items not properly includible in income, such as losses or deductions disallowed under the basis, at-risk, passive loss or excess business loss rules.
Investment items such as capital gains or losses, or dividends.
Interest income not properly allocable to a trade or business.
Wage income.
Income not effectively connected with the conduct of business within the U.S. (For more information, go to IRS.gov/eci).
Commodities transactions or foreign currency gains or losses.
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.
Qualified PTP income.

Knowing Your UBIA Qualifying Property

UBIA stands for Unadjusted Basis Immediately After Acquisition.

What is Basis?

The basis is generally the amount of your capital investment in property for tax purposes. Use your basis to figure depreciation, amortization, depletion, casualty losses, and any gain or loss on the sale, exchange, or other disposition of the property. In most situations, the basis of an asset is its cost to you.

UBIA Is The Basis On The Property's Placed In-Service Date

This means you disregard the current basis of your property that accounts for depreciation and just use the initial basis on its placed in-service date.

What Property Qualifies?

Tangible property currently used in the business which was used at any point of the year to produce QBI and the depreciable period for which has not ended before the close of the taxable year.

What Is The Depreciable Period?

The latter of 10 years or the last day of the last full year in the depreciation schedule.

Start With This Chart:

Figure A:

Take your QBI x 20% =

Take your (Taxable Income - Capital Gains) x 20% =

Your QBI Deduction is the lower amount of the two figures.

Figure B:

Step 1:

Wages you paid to employees x 50% =

(Wages you paid to employees x 25%)+ (2.5% x UBIA Qualifying Property) =

The highest of these two amounts is your maximum qualified deduction.

Step 2:

Maximum Qualified Deduction =

20% QBI =

(Taxable Income - Capital Gains) x 20% =

Your QBI Deduction is the lower of the 3 amounts

Figure C:

Step 1: Phase in Percentage

Single: Taxable Income over Threshold:______________ x 2 = ___________➗100,000 =______________

(Threshold for Single Taxpayer is $163,300)

Married: Taxable Income over Threshold: ______________ ➗ 100,000 =____________________

(Threshold for Married Taxpayer is $326,600)

The result is your phase in %

For example: If I am single and I made $175,300 in taxable income than I would take (173,300 - 163,300 threshold to get $12,000 over the threshold.

12,000 x 2= 24,000 ➗100,000 = .24 or 24%. My phase in percentage is 24%

Step 2: Eligible Percentage

Eligible Percentage = 100% - Phase in Percentage

( In the example above, my Eligible Percentage would be 76%)

Step 3:

QBI x Eligible Percentage = _____________________
Answer on number (1) x 20% =____________________
W-2 Wages Paid to Employees x Eligible Percentage =_____________________
UBIA Qualified Property x Eligible Percentage =_____________________
Answer to number (3) x 50% = __________________
( Answer to number (3) x 25% ) + ( Answer to number (4) x 2.5%) = ________________
Which figure is higher? Number (5) or (6)? Enter amount here ____________________
Subtract number (7) from number (2): __________________(if less than 0, enter 0)
Take answer (8) x Phase in Percentage = ____________________
Subtract answer (9) from answer (2): __________________
Enter the smaller amount of answer (2) or answer (7):__________________
Enter the greater amount of answer (11) or answer (10):_____________________
Taxable Income - Capital Gains =_____________________
Answer (13) x 20% =___________________
Enter in the lesser of Answer (12) or Answer (14):_________________

Answer 15 is your QBI Deduction

Are You Still Alive?! If so, congratulations! You did it! Now you know all about the QBI Deduction. Have questions? Leave me a comment and I'll get back to you.