8584 / How is the Section 199A QBI deduction calculated for taxpayers with income that exceeds the relevant threshold levels?

(1)  The QBI component (see below), and

(2)  20 percent of the combined amount of qualified REIT dividends and qualified PTP income.

This amount is then compared to 20 percent of the amount by which the taxpayer’s taxable income exceeds net capital gain. The lesser of the two amounts is the Section 199A deduction.¹ For a relatively simple business with no qualifying REIT dividends or PTP income, the calculation is fairly straightforward, as illustrated in Example 1.

Example 1: Kevin owns land that is leased as beach parking in a tourist town. His business generated $1 million QBI for the year, and paid no wages. His UBIA for the year was zero, because the land he owns is not depreciable and, as such, is not qualified property. After unrelated deductions, his taxable income was $980,000. He exceeds the threshold limits, so must complete the calculations regarding the W-2 wage and QBI limits. However, because both of these figures are zero, his QBI deduction is zero.

Before calculating the “QBI component,” the taxpayer must take the following computational steps to determine the figures that will apply in calculating the QBI component itself:

(1)  SSTB Exclusion. The SSTB exclusion (see Q ) is applied first. If the SSTB’s income is within the phase-in range (see below), then the relevant percentage of QBI, W-2 wages and UBIA is taken into account. If the SSTB’s income is above the phase-in range, none of the taxpayer’s QBI, W-2 wages or UBIA are taken into account in calculating the deduction.

(2)  Aggregation. If the taxpayer aggregates businesses, the QBI, W-2 wages and UBIA of all businesses must first be aggregated before applying the W-2 and UBIA limits below.

(3)  Netting. If QBI from any one business is negative, the taxpayer must offset QBI from other businesses that had positive QBI for the year with the QBI from each business with negative QBI. This is done in proportion to the relative amounts of net QBI in the businesses with positive QBI. This “adjusted QBI” is used in figuring the deduction, as indicated below.