Question

What is the purpose of the qualified business income deduction? Explain how it is calculated. (2018 tax rules)

Answer 1

The qualified business income deduction was in effect for the first time in 2018, allowing owners of sole proprietorships, partnerships, trusts, and S corporations to deduct 20% of their qualified business income (QBI).

The deduction is generally available to taxpayers whose 2018 taxable incomes fall below $315,000 for joint returns and $157,500 for other taxpayers. The deduction is generally equal to the lesser of 20% of the taxpayer’s QBI plus 20% of the taxpayer’s qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income, or 20% of taxable income minus net capital gains. Deductions for taxpayers above the $157,500/$315,000 thresholds may be limited; the application of those limits is described in the proposed regulations.