Qualified Business Income (QBI) is determined by subtracting deductible expenses properly allocable to the qualified business from gross income. These deductible expenses must be connected with the trade or business within the United States. For example, if a taxpayer’s business generated $200,000 in gross income and had $50,000 in deductible business expenses, the resulting QBI would be $150,000.
The calculation of QBI is significant because it directly impacts the eligibility for and the amount of the qualified business income deduction, authorized under section 199A of the Internal Revenue Code. This deduction can substantially reduce a taxpayer’s overall tax liability. The deduction was introduced as part of the Tax Cuts and Jobs Act of 2017, offering tax relief to owners of pass-through entities and self-employed individuals.