What is a "qualified business income" deduction?

A "qualified business income" deduction is a specific provision under the Internal Revenue Code designed to provide taxpayers with a tax deduction of up to 20% of their qualified business income. This deduction applies primarily to income generated from pass-through entities, such as sole proprietorships, partnerships, S corporations, and certain trusts and estates.

The deduction aims to reduce the tax burden on individuals who derive income from these types of businesses, incentivizing entrepreneurship and fostering small business growth. The income must be effectively connected with the conduct of a trade or business, and there are various rules and limitations regarding eligibility and calculation, including thresholds based on taxable income levels.

While the other choices presented relate to different aspects of taxation, they do not accurately define the qualified business income deduction. For instance, it is not limited to capital gains nor does it pertain to income from passive investments. Additionally, it is not designed to deduct all forms of business income; the focus is specifically on income from specified pass-through entities that meet certain criteria.