What is QBI?
The Qualified Business Income (QBI) deduction, also known as Section 199A, allows certain businesses, including sole proprietors, partnerships, LLCs, and S corporations, to claim up to 20% of business income from taxable income.
Do I qualify for the Qualified Business Income deduction?
This deduction is available to those that file a Schedule C, Profit or Loss from Business, or a Schedule K-1 from their S corp on their Form 1040 that qualifies as a service trade or business.
However, some key differences exist in claiming QBI, depending on whether you are a sole proprietor or an S corporation. If you are unsure of your filing status, please see: Do I file taxes as a Sole Proprietor or an S corporation?
QBI for Sole Proprietors
As a sole proprietor, your qualified business income is generally the net income from your business, reduced by expenses, excluding income from certain types of businesses (e.g., specified service trades or businesses, like law or accounting). The QBI deduction is based on net income after expenses, and the entire income is subject to self-employment tax.
- Deduction Percentage: You can deduct up to 20% of your QBI. This deduction is applied directly on your individual tax return (Form 1040) and is not subject to self-employment taxes. The maximum deduction is also subject to income limitations (e.g., if your taxable income is above a certain threshold, additional calculations and limitations may apply).
- Self-Employment Taxes: Sole proprietors must also pay self-employment taxes (Social Security and Medicare taxes) on their net income from the business. The QBI deduction doesn’t reduce your self-employment taxes; it only reduces your taxable income for income tax purposes.
QBI for S Corporations
As an S Corporation, the QBI deduction is still generally available on the pass-through income from the business. The income passed through to shareholders is reported on their individual tax returns, and the QBI deduction applies to that income.
Unlike a sole proprietor, an S Corp shareholder who works for the business receives a reasonable salary (wages) via payroll. The QBI deduction applies to the income passed through to shareholder that are reported on Box 1 of Schedule K-1.
- QBI Deduction Limits for S Corps: Like with a sole proprietor, the QBI deduction for an S Corp is subject to income thresholds and limitations. If your taxable income exceeds a certain threshold, such as $340,100 for married filing jointly in 2024, this amount changes yearly due to inflation. The deduction might be limited or phased out, particularly if your business is in a specified service trade or business (SSTB) like therapy.
Qualifying for QBI
The QBI deduction is available to pass-through businesses, but it is further limited to whether or not the business qualifies as a Specified Service Trade or Business (SSTB). As a mental health professional, this means that you are limited in your ability to apply the advantageous deduction. This deduction is most relevant at the end of the year when you file your 1040 personal tax return.
The next qualification factor depends on the individual’s adjusted gross income. Please note the table below contains the limits for the 2024 tax year.
Filing Status | Total taxable income | Available deduction |
Single | Equal or less than $191,950 | 20% |
Single | $191,951 to 241,950 | Partial deduction |
Single | More than $241,950 | No deduction |
Married Filing Jointly | Equal or less than $383,900 | 20% |
Married Filing Jointly | $383,900 to $483,900 | Partial deduction |
Married Filing Jointly | More than $483,900 | No deduction |