807 / How is an S corporation’s deduction for qualified business income determined?

(a)  the lesser of the combined qualified business income amount for the tax year or an amount equal to 20 percent of the excess of the taxpayer’s taxable income over any net capital gain and cooperative dividends, plus

(b)  the lesser of 20 percent of qualified cooperative dividends or taxable income (reduced by net capital gain).¹

The sum discussed above may not exceed the taxpayer’s taxable income for the tax year (reduced by net capital gain). Further, the 20 percent deduction with respect to qualified cooperative dividends is limited to taxable income (reduced by net capital gain).