The income (or loss) from a sole proprietorship or single member Limited Liability Company (SMLLC) is reported by the business owner on Schedule C (Form 1040). A Schedule C is considered a pass-through business, and its income is eligible for treatment as Qualified Business Income (QBI) for the purpose of calculating the Qualified Business Income Deduction (QBID).
The QBID was enacted as part of the Tax Cuts and Jobs Act of 2017 (TCJA), allowing owners of pass-through businesses to deduct up to 20 percent of the QBI from their taxable income. QBID is taken on the individual owner's tax return.
The starting point for the QBI calculation for a Schedule C filer is the net profit or loss reported on line 31, however that amount will be reduced by the following:
- Deductible part of self-employment tax – A taxpayer pays self-employment tax on the net income of all self-employment activity.
- Contributions to self-employed SEP, SIMPLE, and qualified plans – Contributions to a retirement savings plan that is based on the taxpayer's self-employment earnings.
- Self-employed health insurance deduction - Self-employed health insurance if included in the return as an adjustment to income on Schedule 1.
QBID is generally available to most taxpayers with taxable income before QBID at or below certain thresholds:
- MFJ filing status: 2022: $340,100 / 2021: $329,800 / 2020: $326,600 / 2019: $321,400 / 2018: $315,000
- MFS filing status: 2022: $170,050 / 2021: $164,925 / 2020: $163,300 / 2019: $160,725 / 2018: $157,500
- Single, Head of Household, Qualifying Widow(er): 2022: $170,050 / 2021: $164,900 / 2020: $163,300 / 2019: $160,700 / 2018: $157,500
Taxpayers with incomes above these levels may still be eligible for QBID but it will be subject to three limitations:
- Whether or not the business is a Specified Service Trade or Business (SSTB).
- The amount of W-2 wages paid by the trade or business.
- The unadjusted basis immediately after acquisition of qualified property that was placed in service in the trade or business.
TaxSlayer Pro will calculate this adjustment, otherwise to make or adjust the entries for W-2 wages, qualified assets, or to make a designation that the business is a SSTB, from the Schedule C Edit Menu select Qualified Business Income Deduction Amounts. The following menu options are available:
- Qualified Business Income – QBI is a calculated amount but can be adjusted. Adjusting QBI is uncommon and should only be done if the taxpayer believes a different amount should be reported.
- W-2 Wages Paid – This is generally the wages paid by the sole proprietorship that were reported to the Social Security Administration on a W-2, as well as any elective deferrals and deferred compensation. (See Rev. Proc. 2019-11 for guidance on on how to calculate W-2 wages for the purpose of Section 199A.)
- Unadjusted Basis of Depreciable Assets – Qualified property is the sum of:
(1) the original cost of assets that were placed in service by the business in the past ten years and still used by the business, and
(2) the original cost of assets still being depreciated by the business because the recovery period is greater than ten years.
TaxSlayer Pro uses the entries in the depreciation module to calculate this number. If the taxpayer is calculating depreciation outside of TaxSlayer Pro, you will enter the unadjusted basis here. Note that your adjustments here, if any, do not carry forward; you will need to recalculate and reenter them each year.
- Is Specified Service Business? – This question requires a Yes or No response, with the default answer being No. Changing this response to Yes will then treat the income (or loss) coming from this Schedule C as coming from a SSTB for the purpose of the QBID calculation.
Note: This is a guide on entering the Qualified Business Income Deduction into the TaxSlayer Pro program for a sole proprietorship. This is not intended as tax advice.