How to Calculate Qualified Business Income for the QBI Deduction

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Quick Answer

Qualified business income (QBI) is the net amount of qualified items of income, gain, deduction, and loss with respect to any qualified trade or business. To calculate it, you start with the business's taxable income, add back certain items, subtract the qualified business income deduction itself, and then apply the QBI deduction limit to arrive at the final deduction amount. The exact path depends on whether you are a sole proprietor, partner, S-corporation shareholder, or owner of a qualified REIT or publicly traded partnership.

Table of Contents

Quick Answer
What Counts as QBI
Step-by-Step Calculation
Special Rules for Specified Service Trades
Multiple Businesses and Aggregation
Who Cannot Claim QBI

What Counts as QBI

QBI includes income from a sole proprietorship, partnership, S-corporation, trust, or estate. It also includes income from certain qualified REIT dividends and qualified publicly traded partnership income. However, QBI excludes capital gains or losses, dividends, interest income (other than that properly allocable to a trade or business), reasonable compensation paid to a shareholder-employee of an S-corporation, and guaranteed payments to a partner.

Step-by-Step Calculation

Start with taxable income. Use the taxable income from your return before the QBI deduction.

Add back certain deductions. This includes the QBI deduction itself, the deduction for self-employment tax, the deduction for health insurance (if self-employed), and any deduction for qualified REIT dividends or qualified publicly traded partnership income.

Determine your QBI. The result is the net QBI from each qualified trade or business.

Apply the limitation. The deduction is generally the lesser of 20% of QBI or 20% of taxable income minus net capital gain.

Special Rules for Specified Service Trades

If your business is a specified service trade or business (such as health, law, accounting, or consulting), the QBI deduction may phase out as taxable income increases. Once taxable income exceeds the threshold, the deduction is reduced and eventually eliminated for specified service trades above a higher income level.

Multiple Businesses and Aggregation

You can aggregate multiple qualified trades or businesses to increase the deduction if they share financials, equipment, employees, or a principal asset. Aggregation must be consistent and documented. Each business is tested separately for the QBI and limitation calculations before aggregation is applied.

Who Cannot Claim QBI

Employees generally cannot claim the QBI deduction. The deduction is for owners of pass-through entities and certain investment income from REITs and publicly traded partnerships. If you are a W-2 employee, your wages are not QBI.