Understanding QBI
The Tax Cuts and Jobs Act of 2017 introduced a new tax deduction for qualified business income (QBI). This deduction allows taxpayers to deduct up to 20% of their QBI from a partnership, S corporation, or sole proprietorship.
QBI is the net amount of qualified items of income, gain, deduction, and loss from any qualified trade or business. The deduction is subject to various limitations, including a taxable income threshold, which varies depending on the filer’s filing status.
What is Farming Income?
Farming income is the income generated from agricultural activities, including crop and livestock production, dairy farming, and aquaculture. The income may come from selling produce, livestock, or other farm products, as well as from government programs supporting farmers.
Farming can be a profitable business, but it is subject to significant risks, such as changes in weather, natural disasters, and market volatility.
Agricultural Businesses and QBI
In general, agricultural businesses are considered qualified trades or businesses for the purposes of the QBI deduction. Therefore, farming income may be eligible for the deduction, subject to the other limitations.
However, there are some exceptions and limitations to consider. For example, certain agricultural cooperatives may be eligible for a separate deduction. Moreover, farming income generated from the leasing of land to a farm operator is generally not eligible for the QBI deduction.
Understanding the Taxable Income Threshold
The QBI deduction is subject to a taxable income threshold. For the 2020 tax year, the threshold for married filing jointly taxpayers is $326,600, and for single filers, it is $163,300. The deduction is gradually phased out as taxable income exceeds the threshold, and it is completely phased out for certain high-income taxpayers.
Therefore, if the farming income is the taxpayer’s only source of income, they may be able to deduct up to 20% of their QBI, subject to the taxable income threshold. However, if they have other sources of income, the calculation becomes more complex.
How to Claim the QBI Deduction
To claim the QBI deduction, taxpayers must have income from a qualified trade or business. They must also meet other requirements, such as filing Form 1040 or 1040-SR and reporting the QBI on Form 8995 (or Form 8995-A for certain taxpayers).
It is essential to consult with a tax professional to determine eligibility for the deduction and to ensure that all requirements are met. In addition, taxpayers should keep detailed records of their farming income and expenses to support their QBI calculation.
Tips for Eligibility
To qualify for the QBI deduction, farmers must:
- Be in a qualified trade or business.
- Have taxable income below the threshold.
- File the correct forms.
- Keep detailed records.
Exclusions
The following are excluded from the QBI deduction:
- Wage income, capital gains, and losses, dividends and interest.
- Guaranteed payments to partners or owners.
- Certain specified service trades or businesses.
Conclusion
In conclusion, farming income is generally eligible for the QBI deduction, subject to various limitations and requirements. Taxpayers should consult with a tax professional to determine their eligibility and to take the necessary steps to claim the deduction. By doing so, farmers can reduce their taxable income and keep more of their hard-earned profits.