The 2017 Tax Cuts and Jobs Act introduced the Qualified Business Income Deduction (QBID), as known as Section 199A, offering eligible business owners a potential deduction of up to 20% of their qualified business income. This tax break is available to certain sole proprietors, partnerships, S corporations, and some trusts and estates, if the income comes from a qualified trade or business. In this article, we guide you through understanding current QBID requirements including key limitations, phase-out thresholds, and exceptions that may impact client eligibility.
What is Qualified Business Income?
The IRS defines QBI as the net number of qualified items of income, gain, deduction and loss from any qualified trade or business. The business or trade must be qualified for the income to count towards the QBID. Part of the QBID calculation also requires that business income be reduced by three items: deductible part of self-employment tax, the self-employment health insurance deduction and contributions to qualified retirement plans.
What is a Qualified Business?
Most passthrough businesses, such as sole proprietorships, LLCs, partnerships, and S corporations are considered qualifying businesses. However, there is an exception for Specified Service Trades and Businesses (SSTBs). These are businesses where the principal asset is the reputation of an employee including fields like health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, investing and investment management, trading. Architects and engineers are explicitly excluded from SSTB rules, allowing them to claim the full 20% deduction if eligible.
SSTBs can still qualify for the QBID but have different income limitations than other businesses. The deduction begins to phase-in at a specified threshold and phases out completely as the top of the threshold. The One Big Beautiful Bill expanded the thresholds before taking the QBID for the 2026 tax year (filed in 2027):
Married filing jointly:
- Minimum threshold: $150,000
All other filers:
- Minimum threshold: $75,000
For taxpayers within the threshold for their filing status, the QBID will be calculated on Form 8995, which is supported by your TaxSlayer Pro software. The IRS provides straightforward instructions for Form 8995.
What is the REIT/PTP Component?
In addition to 20% of Qualifying Business Income, the deduction can also include 20% of qualified Real Estate Investment Trust (REIT) dividends and qualified Publicly Traded Partnership (PTP) income. This portion of the deduction is commonly referred to as the REIT/PTP component.
Unlike the QBI portion of the deduction, the REIT/PTP component is not subject to W-2 wags or qualified property limitations. This means that even clients who do not meet the wage or property thresholds for the QBI deduction may still benefit from this portion of the deduction, as long as they have eligible REIT or PTP income.
How does taxable income limit the QBID?
The Qualified Business Income Deduction (QBID) is limited by the taxpayer’s overall taxable income. The deduction must be the lesser of:
- 20% of the QBI component plus REIT/PTP component, OR
- 20% of the taxpayer’s taxable income before the QBID, minus the net capital gains and qualified dividends recognized on the return.
For clients whose only income comes from a passthrough business, their taxable income is often lower than their QBI due to deductions such as the standard or itemized deduction and the deductible portion of the self-employment tax. As a result, they mayonly be able to deduct 20% of their taxable income before the QBID.
Are there other income limits?
The Qualified Business Income Deduction (QBID) is subject to income-based limitations, which vary depending on the taxpayer’s filing status and whether the business is considered a Specified Service Trade or Business (SSTB).
For couples with married filing jointly status, their collective taxable income must be below $394,600, and for every other filing status, it must be below $197,300 to qualify for this deduction.
When the taxable income is above the threshold amounts, the deduction is subject to additional limitations according to the W-2 wages they paid and/or their Unadjusted Basis Immediately after Acquisition (UBIA) of qualified assets.
If the taxpayer is a Specified Service Trade or Business, the QBID is subject to the above limitations along with a phase-out reduction.
How do W-2 wages impact the QBID?
For businesses below the income threshold, W-2 wages don’t need to be considered at all. Businesses above the income threshold, however, will need to consider W-2 wages when calculating their qualified business income. Their QBI could be reduced by the greater of 50% of their W-2 wages OR 25% of their W-2 wages plus 2.5% of UBIA (more on that below).
What is Unadjusted Basis Immediately after Acquisition (UBIA) of qualified property?
When calculating the Qualified Business Income Deduction (QBID), one important factor is the Unadjusted Basis Immediately after Acquisition (UBIA) of qualified property. This can affect the deduction amount, especially for businesses with substantial property but relatively low W-2 wages. To be considered qualified property the property must be:
- Tangible
- Subject to depreciation and
- Used to produce qualified business income
Because UBIA considers the value of the property “immediately after acquisition,” depreciation isn’t considered. However, property used to calculate UBIA must also still be within its depreciation period, typically ten years after it was first put into use by the business. Property beyond this period is excluded from the UBIA calculation.
UBIA becomes relevant to QBID calculation when 2.5% of the business’s UBIA plus 25% of the W-2 wages they pay is great than 50% of the W-2 wages. The UBIA should be included in the taxpayer’s Schedule K-1. With a strong understanding of these terms and basic rules, calculating QBID for your clients should become a relatively straightforward process.
How the QBID can impact the accuracy related penalty for underpayment
Tax returns that include the Qualified Business Income Deduction (QBID) are now subject to a lower threshold for triggering the IRS’s accuracy-related penalty. Typically, the penalty would only apply if the underpayment of tax is more than 10% of the corrected tax liability (or $5,000, whichever is greater). If your client is claiming the QBID, the IRS uses a lower threshold, penalizing taxpayers if the underpayment is more than 5% of the corrected tax liability (or $5,000, whichever is greater). This change increases the likelihood that higher-income taxpayers will trigger the penalty, as the 5% threshold is easier to meet than the standard 10% threshold.
Under provisions originally introduced by the Tax Cuts and Jobs Act and now reinforced by the One Big Beautiful Bill (OBBBA), the IRS may impose a 20% accuracy-related penalty when a taxpayer significantly overstates expenses or understates income.
For example, a taxpayer with a corrected tax liability of $100,000 would now be subject to the penalty with a $5,000 understatement, rather than needing a $10,000 discrepancy. While taxpayers with a total tax liability under $50,000 are still generally protected unless the understatement exceeds $5,000, those with higher liabilities are more exposed under the new 5% rule. You should pay close attention to QBID calculations and ensure accurate reporting of client income and deductions to avoid triggering this penalty.
