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Small Business Tax Deductions

Qualified Business Income Deduction

Eligible small business owners and self-employed individuals can claim the qualified business income deduction (QBI) to deduct 20% of their business income on their tax returns. This is also known as a pass-through deduction. However, there are eligibility requirements that you must meet in order to claim this deduction.

Qualifying for QBI

Your eligibility depends on your taxable income, business tax classification, and type of income. For 2020, your taxable income must not be above $326,600 as a joint filer and $163,300 as a single filer.

Even if your taxable income is over this initial limit, you may still be qualified for the qualified business income deduction. However, in that case, your income must not be over $210,700 for singles and $421,400 for married filing jointly. Earn between these two figures? Make sure to check in with the IRS to see if you’re a fit.

Other than your taxable income, the deduction will apply to the qualified income. This means the income you earn from interests, dividends, capital gains, and earnings outside of the U.S. are not a part of it. So you cannot claim this deduction to reduce your taxable income for these types of income.

Your business tax classification also matters. The entities that are eligible for this tax deduction include the following.

  • Limited Liability Companies (LLCs)
  • Partnerships
  • S Corporations
  • Sole Proprietorships

How to Claim Qualified Business Income Deduction

First and foremost, know that you can claim QBI deduction even if you claim the standard deduction. With that out of the way, here is how you can claim qualified business income deduction.

Same as how you normally file your tax return, compute your adjusted gross income (AGI) on Form 1040 by calculating business income and expenses on Schedule C. Then, once you know that you’re eligible, you can claim this deduction.

As a side note, keep in mind that your total deduction amount is worth up to 20% of your taxable business income. Therefore, your taxable income earned outside of business can’t be reduced any further. So it cannot exceed more than 20% of your taxable income.

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Deborah Ann

Deborah writes everything from federal tax law to local governments. Her writings cover a broad range of government topics. With a little bit of seriousness to the words, everything is simplified to Futufan readers.
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