Did You Know You Can Claim the QBI Deduction in these Situations?

The qualified business income (QBI) deduction allows a subtraction from your taxable income up to 20% of what amounts to your business profits (there are some modifications to this) if you are an owner in a pass-through entity. So if you have a sole proprietorship or own an interest in a partnership, limited liability company, or S corporation, check to see whether you can take this deduction. But you may be unaware that this valuable personal deduction can be claimed in other situations.

Gig activities

If you have a sideline business that’s profitable, you can figure the QBI deduction.

But if your gig activities are considered to be a specified service trade or business (SSTB), then you face an additional limitation in figuring your QBI deduction. An SSTB is a business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset is the reputation or skill of one or more of the owners (e.g., receiving fees for endorsements or personal appearances). Without going into details about the computations, if in 2018 your taxable income (from all sources, not just your gig) is more than $207,500 if you’re single or $415,000 if you’re married filing jointly, then you won’t be able to take any QBI deduction.

Real estate activities

The QBI deduction is limited to income from a trade or business. Whether rental real estate activities amount to a trade or business is not always clear. Fortunately, the IRS has created as safe harbor for a rental real estate enterprise. If you meet all the conditions for this safe harbor, then your rental real estate activities are viewed as a trade or business, making you potentially eligible for the QBI deduction. The conditions (Notice 2019-7) are:

1. You maintain separate books and records to reflect income and expenses for each rental real estate enterprise;
2. For taxable years beginning prior to January 1, 2023, you perform 250 or more hours of rental services per year with respect to the rental enterprise. For taxable years beginning after December 31, 2022, in any 3 of the 5 consecutive taxable years that end with the taxable year (or in each year for an enterprise held for less than 5 years), 250 or more hours of rental services are performed per year with respect to the rental real estate enterprise. The services must be performed by you, or by your employees, agents, and/or independent contractors. Time spent on investor-type activities doesn’t count.
3. You maintain contemporaneous records beginning after December 31, 2018, including time reports, logs, or similar documents, regarding the following: (i) hours of all services performed; (ii) description of all services performed; (iii) dates on which such services were performed; and (iv) who performed the services. Such records are to be made available for inspection at the request of the IRS.

Investments through PTPs and REITs

Even if you don’t own a business, you may still be eligible for the QBI deduction if you are an investor in a publicly-traded partnership (PTP) or a real estate investment trust (REIT). The QBI deduction for an investor is 20% of qualified publicly traded partnership income (QPTPI) and qualified REIT dividends.

Conclusion

These are merely situations in which the QBI deduction is possible. You must still determine whether and to what extent you can claim the deduction, factoring in your taxable income, filing status, and various other business activities. Find more information about the QBI deduction from the IRS (https://www.irs.gov/newsroom/tax-cuts-and-jobs-act-provision-11011-section-199a-qualified-business-income-deduction-faqs).