What is Qualified Business Income (QBI)?
The CPA Exam will primarily test you on the conceptual aspects of qualified business income.
QBI is the net amount of qualified income, gain, deduction and loss from any qualified trade or business. Only items included in taxable income are counted. In addition, the items must be effectively connected with a U.S. trade or business.
Items such as capital gains and losses, certain dividends, and interest income are excluded. W-2 income, amounts received as reasonable compensation from an S corporation, amounts received as guaranteed payments from a partnership, and payments received by a partner for services under section 707(a) are also not QBI.
Qualified business income – consists of ordinary business income less ordinary deductions from the passthrough entity. QBI will not include any wages earned as an employee or guaranteed payments made to partners in a partnership. QBI will also exclude all capital gains and portfolio income (i.e. dividends and interest) when calculating the net amount.
Excluded Items – certain income items will be excluded from the inclusion of qualified business income (QBI). Those items include:
- Dividend income
- Any interest income
- Net gain from foreign currency transactions
- Income from national principal contracts
- Amounts received from an annuity
- Guaranteed payment
Qualified property – will consist of any tangible property that can be depreciated by the qualified business and has been used at any point during the year of generating QBI.
Qualified trade or business – will consist of any businesses other than a Specified Service Trade or Business (SSTB).
Specified Service Trade or Business (SSTB) – For taxpayers with taxable income that exceeds the threshold amount, specified service trades or businesses (SSTBs). An SSTB is a trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, investing and investment management, trading, dealing in certain assets or any trade or business where the principal asset is the reputation or skill of one or more of its employees or owners. The principal asset of a trade or business is the reputation or skill of its employees or owners if the trade or business consists of the receipt of income from endorsing products or services, the use of an individual’s image, likeness, voice, or other symbols associated with the individual’s identity, or appearances at events or on radio, television, or other media formats.
Limitations – If the taxpayer’s taxable income (before the QBI deduction) is above the threshold amount, the deduction may be limited based on whether the business is an SSTB, the W-2 wages paid by the business and the unadjusted basis immediately after acquisition of certain property used by the business.Qualified business income thresholds exist and will fluctuate on an annual basis. Income earned through a C corporation or by providing services as an employee is not eligible for the deduction regardless of the taxpayer’s taxable income. Income earned through a C corporation or by providing services as an employee is not eligible for the deduction regardless of the taxpayer’s taxable income.
Below is the qualified business income (QBI) video lecture from Universal CPA Review.
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