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What is the Qualified Business Income (QBI) deduction?

The Qualified Business Income Deduction (QBI) allows pass-through businesses, including eligible small business owners, to deduct up to 20% of their qualified business income. Pass-through businesses pass their income to their owners, who report it on their personal tax returns. This income is subject to the recipient’s tax rate instead of the usually lower corporate tax rate.

Qualified business income must be effectively connected with a U.S. trade or business. Items such as capital gains and losses, and certain dividends and interest income are excluded.

In most cases, to claim the QBI deduction, your 2018 taxable income must be below $157,500 for individual returns or $315,000 for joint returns. There are exceptions to this limit in certain cases.

If eligible for the deduction, you can typically deduct the lesser of 20 percent of your qualified business income plus 20 percent of your qualified real estate investment trust dividends and qualified publicly traded partnership income or 20 percent of your taxable income minus net capital gains.

Qualified business income includes income from a qualified domestic trade or business but does not include compensation you received as an employee.

It does not include employee wages, capital gains or losses, interest income and certain dividend income. Only items included in taxable income can be qualified business income.

You can learn more at IRS aims to clear up confusion around the pass-through deduction.

The IRS also provides more detailed answers to common questions at Tax Cuts and Jobs Act, Provision 11011 Section 199A - Qualified Business Income Deduction FAQs.

How do I claim the Qualified Business Income deduction on Credit Karma Tax?

Credit Karma Tax will use the information you provide with your business income to determine the amount you can deduct, if any, as qualified business income.

Pass-through income you report on the following schedules and forms may be eligible:

  • Schedule C Profit or Loss from Business (Sole Proprietorship)
  • Schedule E Supplemental Income and Loss
  • Schedule F Profit or Loss from Farming
  • Schedule K-1 Partner’s Share of Income, Deductions, Credits, etc.
  • Schedule K-1 Shareholder’s Share of Income, Deductions, Credits, etc.
  • Form 1099-DIV Dividends and Distributions with amounts in box 5a
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