Non SSTBs: It is important to note that even within the definition of a SSTB, there are exceptions. Many single-owner and self-employed businesses are NOT considered to be SSTBs. Those generally not falling into the SSTB designation are: rideshare services, sales, engineering, architecture, real estate and property management, contracting, landscaping, childcare and eldercare, grooming (even of pets), notary services, and restaurants and food trucks. The categorization of consulting businesses can be a bit complicated, because the segment is so broad. If you provide counsel or advice to clients to help them achieve goals and solve their problems, then your business would be a SSTB. But, if you do not provide professional advice, you would NOT be considered a SSTB – such as those in educational training, or even fitness training.

How does it work?

Every year the IRS sets thresholds and phase-in ranges for QBI, which are adjusted for inflation. For instance, for 2023 returns, total taxable income will have to be under $182,100 for single filers or $364,200 for joint filers in order to qualify for the full deduction. Phase-in ranges apply above these thresholds, which could limit, or eliminate the deduction.

QBI is defined as net domestic business taxable income. It disregards investment income, guaranteed compensation for a partner’s services to a partnership, payments for services rendered to the business, REIT or cooperative dividends, and income from publicly traded partnerships (PTPs). It is the net amount of qualified items of income, gain, deduction and loss from any qualified business, and generally this includes, but is not limited to, the deductible part of self-employment tax, self-employed health insurance, and deductions for contributions to qualified retirement plans (e.g. SEP, SIMPLE and qualified plan deductions). The deduction is limited to the lesser of the QBI component plus any REIT/publically traded partnership (PTP) component or 20% of the taxpayer's taxable income minus the net capital gain. When an owner has multiple qualified businesses, the deduction is calculated for each, with the aggregate limited to 20 percent of overall taxable income.

For SSTBs, both the thresholds and phase-in ranges apply. The SSTB exception does not apply for taxpayers with taxable income at or below the threshold amount (they may take the 20% deduction) and is phased in for taxpayers with taxable income within the designated phase-in range above that threshold. For taxpayers with taxable income above the phase-in range, no deduction is permitted with respect to any SSTB.

For taxpayers with taxable income from non-SSTB entities which falls above the highest level of phase-in range there are some limitations to the deduction. For 2023, those top levels are $232,100 for single filers and $464,100 for joint filers with total taxable income from qualified businesses (non-SSTB), REITs and PTPs. For taxable income above these levels, the QBI deduction is based on a formula. The GREATER of 50% of W-2 wages is compared to 25% of those W-2 wages plus 2.5% of the acquisition cost of depreciable business property. The GREATER of this calculated number is compared to QBI. The SMALLER of these two numbers is the QBI deduction based on the formula.