Marcus Chen
The Qualified Business Income (QBI) deduction is a tax deduction that allows eligible self-employed and small-business owners to deduct up to 20% of their qualified business income on their taxes. The QBI deduction was set to expire at the end of 2025 but has since been made permanent. The deduction is available to businesses that are not considered Specified Service Trade or Business (SSTB) and are under the income threshold. This includes sole proprietorships, partnerships, S corporations, and some trusts and estates. The income must be from a U.S. trade or business and cannot include capital gains, certain types of dividends, interest income, or income from outside the U.S. So, is painting a qualified trade or business for QBI? It depends on whether the painting business meets the criteria mentioned and does not fall under the SSTB category.
| Characteristics | Values |
|---|---|
| Deduction | 20% of QBI |
| Applicable to | Self-employed and small business owners, including owners of sole proprietorships, partnerships, S corporations, and some trusts and estates |
| Exclusions | C-corporations, income from outside the U.S., and certain wage and guaranteed payments to partners and shareholders |
| Income threshold | $197,300 for single filers and $394,600 for joint filers in 2025; will be adjusted for inflation in 2026 |
| Phase-in threshold | $50,000 for single filers and $100,000 for joint filers in 2025; will increase to $75,000 and $150,000, respectively, in 2026 |
| Specified Service Trade or Business (SSTB) | Includes businesses in fields such as health, law, accounting, consulting, athletics, financial services, and any business where the principal asset is the reputation or skill of its employees |
| Limitations | May depend on the nature of the trade or business, total W-2 wages paid, and the unadjusted basis immediately after acquisition (UBIA) of qualified property |
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What You'll Learn
QBI deduction for independent contractors
The Qualified Business Income (QBI) deduction is a tax deduction that allows eligible self-employed and small-business owners to deduct up to 20% of their qualified business income on their taxes. This deduction is also referred to as the Section 199A deduction.
The QBI deduction is available to taxpayers with qualified business income, qualified REIT dividends, or qualified PTP income. It is designed to provide tax relief to small businesses, including independent contractors and freelancers.
To qualify for the QBI deduction, the taxpayer's total taxable income must be under a certain threshold. For tax year 2025, the threshold is $197,300 for single filers and $394,600 for joint filers. The threshold will be adjusted for inflation in 2026. If the taxpayer's income exceeds the threshold, the deduction may be limited or phased out.
For independent contractors, the QBI deduction is calculated based on their taxable business income. This includes income from any qualified trade or business, which can include sole proprietorships, partnerships, S corporations, trusts, and estates. However, income earned as an employee, such as wages, is not eligible for the QBI deduction.
It is important to note that the QBI deduction has certain limitations and exclusions. For example, it excludes capital gains or losses, certain types of dividends, interest income, and income earned outside the U.S. Additionally, the deduction may be limited for businesses that are considered Specified Service Trades or Businesses (SSTB), which are trades or businesses involving the performance of services in certain fields, such as health, law, accounting, and others.
Independent contractors should consult with a tax professional or refer to the IRS guidelines to determine their eligibility for the QBI deduction and understand any limitations or exclusions that may apply to their specific situation.
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QBI and sole proprietorships
The Qualified Business Income (QBI) deduction is a tax deduction that allows eligible self-employed and small-business owners to deduct up to 20% of their qualified business income on their taxes. This deduction applies to sole proprietorships, partnerships, S corporations, trusts, and estates. It is important to note that this deduction is only applicable to income from a qualified trade or business within the United States.
Sole proprietorships are the most common type of business structure in the United States, with many freelancers and independent contractors operating as such. These sole proprietors can take advantage of the QBI deduction, which allows them to deduct up to 20% of their qualified business income. This deduction is calculated based on the net amount of qualified items of income, gain, deduction, and loss from their business. It is important to note that certain items, such as capital gains, losses, and specific types of dividends and interest income, are excluded from QBI.
To be eligible for the QBI deduction, sole proprietors must meet certain requirements. Firstly, their taxable income must be within the specified limits, which are adjusted annually based on inflation. If their income exceeds these limits, they may still qualify for a partial deduction, but it will be reduced. Additionally, the QBI deduction is not applicable to income earned outside the United States or from providing services as an employee.
The QBI deduction consists of two main components: the QBI component and the REIT/PTP component. The QBI component is subject to limitations based on factors such as the type of trade or business, W-2 wages paid, and the unadjusted basis immediately after acquisition (UBIA) of qualified property. The REIT/PTP component, on the other hand, allows for a deduction of 20% of qualified REIT dividends and PTP income without limitations from W-2 wages or UBIA of qualified property.
It is worth noting that sole proprietors in certain industries, such as "professional services," may face restrictions in claiming the QBI deduction. These businesses are referred to as Specified Service Trade or Business (SSTB) and include fields such as health, law, accounting, consulting, and financial services. Additionally, businesses where the principal asset is the reputation or skill of its employees may also fall under this category.
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QBI and partnerships
The Qualified Business Income (QBI) deduction is a tax deduction that allows eligible self-employed and small-business owners to deduct up to 20% of their qualified business income on their taxes. This deduction is also referred to as the Section 199A deduction.
QBI is the net amount of qualified items of income, gain, deduction, and loss from any qualified trade or business. This includes income from partnerships, S corporations, sole proprietorships, and certain trusts.
For partnerships, the QBI component of the deduction equals 20% of QBI from a domestic business operated through a partnership. This component is subject to limitations depending on the partner's taxable income, which 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's important to note that partnerships themselves are not taxpayers and are generally not eligible for the deduction. Instead, partnerships report each partner's share of QBI, W-2 wages, UBIA of qualified property, qualified REIT dividends, and qualified publicly traded partnership (PTP) income. This information allows each partner to determine their individual QBI deduction.
In addition to the QBI component, the REIT/PTP component of the deduction equals 20% of qualified REIT dividends and qualified PTP income. This component is not limited by W-2 wages or the UBIA of qualified property. However, the amount of PTP income that qualifies may be limited depending on the type of the PTP's trade or business and the taxpayer's taxable income.
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QBI and S corporations
The Qualified Business Income (QBI) deduction is a tax deduction that allows eligible self-employed individuals and small business owners to deduct up to 20% of their QBI. This deduction was set to expire at the end of 2025 but has been made permanent. The QBI deduction is available to taxpayers with total taxable income below a certain threshold, which was $197,300 for single filers and $394,600 for joint filers in 2025. This threshold will be adjusted for inflation in subsequent years.
The QBI deduction comprises two main components: the QBI component and the REIT/PTP component. The QBI component is subject to limitations depending on the taxpayer's taxable income, 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 if the taxpayer is a patron of an agricultural or horticultural cooperative. The REIT/PTP component equals 20% of qualified REIT dividends and qualified PTP income and is not limited by W-2 wages or UBIA of qualified property.
S corporations are eligible for the QBI deduction, which can provide significant benefits to their owners. The QBI deduction allows S corporation owners to deduct up to 20% of their business income from their taxable income, helping them save on taxes. However, it is important to note that reasonable compensation, such as the salary paid to S Corp owners, is excluded from QBI.
To determine eligibility for the QBI deduction, taxpayers must consider whether their business is a specified service trade or business (SSTB). If it is an SSTB, the total taxable income must be evaluated to determine if the business can claim the full 20% deduction, a limited deduction, or no deduction. Additionally, for taxpayers above the threshold amounts, the QBI deduction may be limited by the amount of W-2 wages paid and the UBIA of qualified property.
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QBI and trusts
The Qualified Business Income (QBI) deduction, also known as the Section 199A deduction, was enacted as part of the Tax Cuts and Jobs Act (TCJA) of 2017. It allows eligible self-employed and small-business owners to deduct up to 20% of their qualified business income on their taxes. This deduction applies to income from sole proprietorships, partnerships, S corporations, and certain trusts and estates.
Trusts and estates can have income from a trade or business and can claim the QBI deduction at the entity level, rather than passing it through to the beneficiaries. A non-grantor trust or an estate may either claim the QBI deduction or provide the Section 199A information to their beneficiaries. Trusts have their own special rules under the QBI. For example, if a trust is formed solely to receive a QBI deduction, the anti-abuse rule will disallow the deduction and aggregate it with the funding entity. Additionally, two or more trusts with the same grantors or primary beneficiaries will be treated as one trust.
For trusts, the QBI deduction is calculated based on the trust's share of items of income, gain, deduction, and loss from trades or businesses conducted by partnerships (excluding PTPs), S corporations, and other trusts or estates. Trusts can also include Section 162 trades or businesses, but not Specified Service Trades or Businesses (SSTBs).
The income threshold for trusts to qualify for the QBI deduction varies by year. For example, in 2020, the income threshold was $163,300, while in 2021, it increased to $164,900. In 2022, the income threshold was $214,900, and it is subject to adjustments for inflation.
The QBI deduction is a complex topic, and it is always recommended to consult a tax professional or refer to the IRS regulations for the most accurate and up-to-date information.
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Frequently asked questions
The QBI deduction, or Qualified Business Income deduction, allows eligible self-employed and small-business owners to deduct up to 20% of their qualified business income on their taxes.
Self-employed individuals, small business owners, and owners of sole proprietorships, partnerships, S corporations, and some trusts and estates may be eligible for the QBI deduction. Businesses in certain industries, such as professional services, are not eligible for the deduction if their income is over a certain threshold.
A qualified trade or business is any trade or business that meets certain criteria. The main exception is for a Specified Service Trade or Business (SSTB), which includes businesses in fields such as health, law, accounting, consulting, and financial services.
The QBI deduction is calculated as 20% of the net amount of qualified income, gain, deduction, and loss from a qualified trade or business. The deduction may be limited by factors such as the taxpayer's income, the amount of W-2 wages paid by the business, and the value of the property owned by the business.
