Qualified Business Income (QBI) Deduction Calculator
Calculate your potential Qualified Business Income (QBI) deduction based on your taxable income and business details.
Understanding the Qualified Business Income (QBI) Deduction
The Qualified Business Income (QBI) deduction, also known as the Section 199A deduction, is a valuable tax deduction for owners of pass-through businesses. Introduced by the Tax Cuts and Jobs Act of 2017, it allows eligible taxpayers to deduct up to 20% of their qualified business income.
Who is Eligible?
Generally, individuals with taxable income below certain thresholds can claim the deduction. For higher earners, the deduction may be limited based on the amount of W-2 wages paid by the business and the unadjusted basis immediately after acquisition (UBIA) of qualified property the business owns. The thresholds are adjusted annually for inflation.
Key Terms Explained:
- Taxable Income (Before QBI Deduction): This is your Adjusted Gross Income (AGI) minus any above-the-line deductions. It represents the income on which you'll calculate your tax liability.
- Qualified Business Income (QBI): This refers to the net income from your qualified trades or businesses. It generally includes income from partnerships, S corporations, sole proprietorships, and certain trusts and estates. It typically excludes investment income like capital gains or dividends.
- W-2 Wages Paid by Business: This is the total amount of wages subject to withholding that your qualified business paid to its employees during the tax year.
- QBI-Qualified Property Unadjusted Basis Immediately After Acquisition (UBIA): This refers to the depreciable property used in the trade or business, like machinery or equipment, that was acquired during the year or placed in service.
How is the QBI Deduction Calculated?
The calculation can be complex, especially for higher earners. For taxpayers whose taxable income is below the threshold amount ($191,950 for single filers and $383,900 for married filing jointly in 2024), the deduction is the lesser of:
- 20% of the qualified business income (QBI).
- 20% of the taxpayer's taxable income before the QBI deduction (reduced by any net capital gain).
For taxpayers whose taxable income exceeds the threshold, the deduction is subject to limitations based on W-2 wages and UBIA of qualified property. The deduction is the lesser of:
- 20% of the qualified business income (QBI).
- The greater of:
- 50% of the W-2 wages paid by the business.
- 25% of the W-2 wages paid by the business plus 2.5% of the UBIA of qualified property.
- And, it's also limited to 20% of the taxpayer's taxable income before the QBI deduction (reduced by any net capital gain).
For the highest income earners (above the upper threshold: $241,950 single, $483,900 married filing jointly in 2024), the deduction is phased out and can be completely eliminated.
Example Calculation:
Let's consider a single filer with the following details for 2024 (assuming their taxable income is below the threshold):
- Taxable Income (Before QBI): $100,000
- Qualified Business Income (QBI): $70,000
- W-2 Wages Paid: $20,000
- UBIA of Qualified Property: $10,000
Step 1: Calculate 20% of QBI
$70,000 * 0.20 = $14,000
Step 2: Calculate 20% of Taxable Income (before QBI)
$100,000 * 0.20 = $20,000
Step 3: Determine the lesser of Step 1 or Step 2
The lesser amount is $14,000. Therefore, the QBI deduction is $14,000.
Example for Income Above Threshold (Simplified illustration for the wage/property limitation):
Assume a single filer with Taxable Income (Before QBI) of $200,000. QBI = $150,000 W-2 Wages = $40,000 UBIA = $20,000
Calculation 1: 20% of QBI
$150,000 * 0.20 = $30,000
Calculation 2: Wage/Property Limitation
50% of W-2 Wages: $40,000 * 0.50 = $20,000
25% of W-2 Wages: $40,000 * 0.25 = $10,000
2.5% of UBIA: $20,000 * 0.025 = $500
Sum of 25% Wages + 2.5% UBIA: $10,000 + $500 = $10,500
The greater of the two limits is $20,000 (from 50% of wages).
Calculation 3: 20% of Taxable Income (Before QBI)
$200,000 * 0.20 = $40,000
The QBI deduction is the lesser of Calculation 1 ($30,000) and Calculation 2 ($20,000), which is $20,000. This is also less than Calculation 3 ($40,000), so the deduction is $20,000.
Disclaimer:
This calculator provides an estimated QBI deduction and is for informational purposes only. Tax laws are complex and subject to change. Consult with a qualified tax professional for personalized advice regarding your specific tax situation.