The QBI deduction is more complicated than just claiming a 20% deduction on your income. Qualified trades and income limits are critical pieces, but you also need to know how to apply or exclude any business losses.
If one of your businesses experiences a loss, what do you do with the loss? How does it affect your deduction amount? Here are our answers to common questions regarding losses and the QBI deduction.
If I have a loss from one of my businesses, does it follow net operating loss rules? Meaning, do I carry the loss forward and apply it to the business in the future?
Not quite. When calculating your qualified business income deduction, you calculate your QBI separately for each of your businesses but combine them as one on your tax return.
So, if you have a loss in one business and income for another, your loss will reduce the income.
For example, if your QBI from one business is $10,000 and -$5,000 from another, your total QBI for the taxable year is $5,000.
| Income | $10,000 |
| Loss | – $5,000 |
| Total QBI | $5,000 |
What happens when my losses are greater than my business income? Do I get the 20% deduction?
No. Your deduction is delayed to a future taxable year.
If your total QBI is less than zero, you must carry the loss forward into the next tax year. At that time, the QBI will be considered negative QBI from a separate trade or business. You’ll use it to reduce any positive income in that taxable year to calculate the total QBI amount.
For example, you have a loss of $5,000 in 2018. You carry it into 2019. In 2019, your QBI is a positive $15,000. You reduce the $15,000 by $5,000 for a total QBI amount of $10,000.
Then, you’ll move forward with calculating your deduction.
| 2018 Loss | – $5,000 |
| 2019 Income | $15,000 |
| Total QBI for 2019 | $10,000 |
How do limited losses affect my deduction?
If you have a loss that was limited or disallowed before Jan. 1, 2018, you don’t use the loss to calculate your QBI. If a pre-2018 loss is allowed in the taxable year, remember to exclude that loss when calculating your QBI.
But, if you created your loss after Jan. 1, 2018 and it’s a qualified item of deduction or loss, you include it in your QBI calculation. You may have to wait until a future taxable year to claim it, depending on when the loss is allowed.
You must use your disallowed, limited, or suspended losses on a first-in, first-out (FIFO) basis. AKA oldest to newest.
Overall, losses can decrease your total deduction amount and may not help you significantly lower your tax bill. But, they’re still essential factors you need to consider when calculating your QBI deduction.
Have questions about losses, carryforward rules & the QBI deduction? We can help. Let’s talk!
