8593 / Are there any exceptions to the rule that limits the QBI deduction based on W-2 wages and UBIA?

The W-2 wage limitation and UBIA limitation only come into play if the taxpayer’s income for the year exceeds the relevant threshold levels. Therefore, if the taxpayer’s income for the year is $100,000, the QBI deduction is generally 20 percent, or $20,000, depending upon the taxpayer’s total taxable income for the year (see Q to Q ). However, in a more complicated situation, the deduction may be limited or phased out entirely, as discussed in detail in Q and Q , which explain how the QBI deduction is calculated if the taxpayer’s income either exceeds the threshold levels, or is within the phase-out range.

Example. Ed, a sole proprietor, owns a business that generates $400,000 worth of QBI for the year. Ed pays $100,000 in W-2 wages and has $100,000 of qualified property. Ed’s wife earns $200,000 for the year, bringing their total joint income to $600,000. Ed’s income is technically below the relevant threshold for complete phase-out for joint returns, but, when combined with his wife’s income, their total income exceeds the annual threshold amount. Therefore, the limitations apply, and the 20 percent deduction no longer applies. Ed’s deduction is limited to the greater of: 50 percent of W-2 wages ($50,000) or the sum of 25 percent of the W-2 wages of the business plus 2.5 percent of the UBIA of all qualified property ($25,000 + $2,500 = $27,500). Ed’s QBI deduction is therefore $50,000.