8583 / How is the Section 199A QBI deduction calculated for taxpayers with income that does not exceed the relevant threshold levels?

When the taxpayer’s income does not exceed the annual thresholds, the QBI deduction is calculated by adding:

(1)  20 percent of the taxpayer’s total QBI amount, including QBI attributed to a specified service trade or business, and

(2)  20 percent of the combined amount of qualified REIT dividends and 20 percent of qualified publicly traded partnership 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

Example: Matt operates a qualified business that generates annually $100,000 from operations (the business’ QBI is $100,000) and has no capital gains or losses. After his allowable deductions that are not related to the business, his taxable income for the year is $81,000. Matt must compare 20 percent of his QBI for the year ($20,000) to 20 percent of his taxable income for the year ($16,200) (i.e., the amount by which his taxable income, $81,000, exceeds net capital gain for the year, $0). Matt’s Section 199A deduction is the lesser of the two, or $16,200.

If the total QBI amount is a negative amount, the portion of the 199A deduction related to QBI is zero for the year. In the next year, the negative amount is treated as negative QBI from a separate trade or business.² If the REIT or PTP income is negative, that amount is treated as zero for the year, but must be carried forward to offset REIT dividends and qualified PTP income for the next year. W-2 and UBIA amounts from years where QBI was negative are not carried forward.