If you’re not part of a Specific Service Trade or Business, and you pay wages to your employees, this is how you’d calculate your deduction. Your deduction will be capped at the greater of 50% of your employee’s salary or 25% of their salary plus 2.5% of any property you can depreciate. This includes buildings, vehicles, equipment and computers.
This is pretty complicated, so let’s look at an example. Say you’re a self-employed consultant
with your own business. Your total business income before any deductions is $200,000 in 2023. This means you qualify for the Qualified Business Income Deduction (QBID).
However, if your income is in the range where you can claim a partial deduction, you need to do some math. Let's say you also have $300,000 worth of business property and an employee that you pay $50,000 a year.
So first, you calculate 50% of your employee’s wages.
You now have to calculate the second comparison amount.
25% of your employee’s wages plus 2.5% of your property's worth
- 25% x $50,000 = $12,500
- 2.5% x $300,000 = $7,500
- $12,500 + $7,500 = $20,000
So, your QBID will max out at $25,000 as it’s the greater of the two.
We also mentioned earlier that REIT dividends and PTP income can get you an additional QBID. What we didn’t mention is that it’s not so simple. So, if you have dividends from qualified REITs or PTPs, you can grab a second deduction, up to 20% of that income, added to the initial QBI deduction.
After calculating both deductions, you combine them. Then, the overall limit is 20% of your taxable income for the year (pre-QBI deduction), minus net capital gains, including qualified dividends taxed at capital gains rates. This keeps the 20% deduction from overlapping with income already taxed at lower capital gains rates.
Let’s use another example for this. Say you’re a small business owner with an Etsy store
who also invests in real estate. In 2023, you earned $120,000 from the store and received $10,000 in dividends from real estate investment trusts (REITs). You also gained $8,000 from selling stocks.
The Qualified Business Income Deduction (QBID) is initially calculated at 20% of the business income, resulting in $24,000.
You can also claim an additional QBID for the REIT dividends. Take an extra deduction of 20% of the dividends, which is $2,000.
You add both the deductions ($24,000 + $2,000), giving you $26,000. After subtracting these deductions from your total income, your taxable income is $104,000.
- ($120,000 + $10,000) - $26,000 = $104,000
Applying the QBID to the taxable income, you calculate a deduction of $20,800.
However, you still have to account for your net capital gains. Since you got $8,000 from stock sales, this is deducted from the calculated QBID, bringing the final taxable income after QBID and capital gains adjustments to $12,800.
- $20,800 - $8,000 = $12,800