Understanding Qualified Business Income (QBI) Deduction for Engineers and Software Developers

The QBI deduction can be tricky, especially with your mixed income sources. Here's a breakdown that should help: First, your W-2 income ($135k) doesn't qualify for QBI at all - that's employee wages, not business income. For your self-employment income, both consulting ($65k) and software sales ($70k) potentially qualify, but with different rules. Engineering consulting is generally considered a "Specified Service Trade or Business" (SSTB), which means it faces income limitations. Software development and sales (if it's product rather than service) typically isn't an SSTB. The income limits for 2023 are $170,050 for single filers or $340,100 for married filing jointly. Since you mentioned a total of $270k income, your eligibility might be reduced or eliminated depending on your filing status and taxable income calculation. If your taxable income is below the threshold, you can take the full 20% deduction on both income streams. If you're above it, the software income might still qualify but the consulting would phase out.

After struggling with similar QBI questions last year (I do freelance app development and IT consulting), I found this amazing AI tool called taxr.ai that cleared everything up for me. I uploaded my mixed income documents to https://taxr.ai and it analyzed everything to determine exactly what qualified for QBI and what didn't. It broke down my development work into SSTB vs non-SSTB components and gave me crystal clear guidance on what I could claim. Saved me thousands in deductions my previous accountant had missed because they weren't sure about the software development categorization.

Came back to say I tried taxr.ai after posting my skeptical comment, and I have to eat my words. It was INCREDIBLY helpful for my situation. I've been doing both cybersecurity consulting (definitely SSTB) and selling a SaaS product (potentially non-SSTB), and it clearly separated my income streams and showed exactly how the QBI calculated for my situation. The tool asked really specific questions about my business activities that my previous accountant never bothered with. It identified that my SaaS product qualifies as non-SSTB income even though it's in the tech space, which means a portion of my business income gets the full QBI benefit. This resulted in almost $12k more in deductions than I would have otherwise claimed.

If you're still struggling to get clear answers about your QBI situation, you might want to go straight to the source. I was in the exact same boat (engineering consulting + software product sales) and spent WEEKS trying to get someone at the IRS who could give me a definitive answer. After endless busy signals and disconnects, I tried https://claimyr.com and was shocked when they got me through to a senior IRS agent in under 20 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent walked me through the exact requirements for my situation and confirmed that my software product sales qualified as non-SSTB income while my engineering consulting was subject to the phase-out rules. Totally worth it for the peace of mind.

Ok I have to admit I was 100% wrong about Claimyr. I tried it after posting that skeptical comment because I was desperate to talk to someone at the IRS about my QBI situation. Got connected to an IRS tax law specialist in about 15 minutes! The specialist confirmed that my software product sales (even though somewhat customized) qualify as non-SSTB business income eligible for the full QBI deduction. My engineering consulting income is subject to the phase-out since it's considered a specified service. Having that direct confirmation from the IRS gave me the confidence to properly claim the deduction. Was stressing for months about this and finally have a clear answer. Sometimes being wrong feels pretty good!

One thing nobody's mentioned yet is that your QBI calculation gets even more complex if your taxable income exceeds the threshold. In that case, you also need to consider the W-2 wage limitation and qualified property factors. For 2023, if your taxable income exceeds $220,050 (single) or $440,100 (married), your QBI deduction becomes limited to the GREATER of: - 50% of your share of W-2 wages paid by the business, OR - 25% of W-2 wages PLUS 2.5% of the unadjusted basis of qualified property This becomes super important if you have a business with few employees or little qualified property but high profits.

The discussion here is super helpful but there's one thing I haven't seen addressed: rental income. I have a similar situation (W2 plus consulting plus software sales), but I also own a couple rental properties. Does rental income qualify for QBI? Some accountants told me yes, others said no.

This is exactly the kind of complex QBI situation that trips up so many people! Diego, based on your income breakdown, you're definitely going to want to be strategic about this. Your W-2 income of $135k doesn't qualify for QBI at all - that's correct. For your self-employment income ($65k consulting + $70k software = $135k total), you're looking at potential QBI on that $135k, but with important caveats. The key issue is that your total income of $270k likely puts you above the phase-out thresholds ($170,050 single/$340,100 MFJ for 2023). This means your engineering consulting income will be significantly limited or eliminated from QBI since it's an SSTB. However, your software sales income might still qualify if it's truly product-based rather than service-based. The distinction others mentioned about custom vs. packaged software is crucial here. One strategy to consider: maximizing retirement contributions (SEP-IRA, Solo 401k) to potentially get your taxable income below the phase-out thresholds. Even a partial reduction could save you thousands. Also, make sure your CPA considers the W-2 wage limitation that applies at higher income levels - this could further complicate your QBI calculation even for the qualifying income streams. The tools others mentioned (taxr.ai, claimyr.com) seem worth exploring for the analysis, but definitely still work with your CPA for the final filing!