What Is Qualified Business Income?

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There’s a new small business tax break that may lower the amount you pay Uncle Sam. The deduction for qualified business income, also known as the pass-through business income deduction, allows eligible business owners to deduct up to 20 percent of qualified income on their tax returns.

Here’s a quick rundown on this tax law change and how it affects your small business.

What Is Qualified Business Income?

  • According to the IRS, the qualified business income definition is “the net amount of qualified items of income, gain, deduction and loss from any qualified trade or business.” In other words, it’s your net business profit.
  • Certain professional services, financial services and performing arts businesses earning more than $315,000 for a married couple filing a joint return, or $157,500 for all others, are ineligible for this small business tax break.

What Does ‘Pass-Through’ Mean?

This term refers to business income “passing through” the business to the business owner, who pays individual income tax rates on the earnings.

Male business owner reviews his small business tax break

Does the Deduction Apply to All Business Structures?

  • Sole proprietorships, partnerships and S corporations qualify for this deduction.
  • Income earned through a C corporation is not eligible.

How Do I Calculate My Deduction?

The 20 percent deduction will apply to the lesser of:

  • Your qualified business income
  • Your taxable income minus your net capital gains

Check out our piece on how the 2018 Tax Cuts and Jobs Act affects your business to learn more about this small business tax break.

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