Question

Describe the purpose behind the Qualified Business Income deduction and which taxpayers it is available to.

Answer 1

Answer-

The deduction allows eligible taxpayers to deduct up to 20 percent of their qualified business income (QBI), plus 20 percent of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income.

The deduction has two components.

1. QBI Component. This component of the deduction equals 20 percent of QBI from a domestic business operated as a sole proprietorship or through a partnership, S corporation, trust or estate. The QBI Component is subject to limitations, depending on the taxpayer’s taxable income, that 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 may also be reduced by the patron reduction if the taxpayer is a patron of an agricultural or horticultural cooperative.
   
2. REIT/PTP Component. This component of the deduction equals 20 percent of qualified REIT dividends and qualified PTP income. This component is not limited by W-2 wages or the UBIA of qualified property. Depending on the taxpayer’s taxable income, the amount of PTP income that qualifies may be limited depending on the PTP’s trade or business.

The deduction is limited to the lesser of the QBI component plus the REIT/PTP component or 20 percent of    the taxable income minus net capital gain.

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. Generally 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 (e.g. SEP, SIMPLE and qualified plan deductions).

QBI does not include items such as:

• Items that are not properly includable in taxable income
• Investment items such as capital gains or losses or dividends
• Interest income not properly allocable to a trade or business
• Wage income
• Income that is not effectively connected with the conduct of business within the United States
• Commodities transactions or foreign currency gains or losses
• Certain dividends and payments in lieu of dividends
• 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
• PTP income