Qualified Business Income (QBI) Deduction Explained

The Qualified Business Income (QBI) deduction, established under Section 199A of the Tax Cuts and Jobs Act, allows eligible business owners and self-employed individuals to deduct up to 20% of their qualified business income. This deduction is an above-the-line deduction (Schedule 1) that reduces adjusted gross income before calculating taxable income for standard/itemized deductions, available to pass-through entities (S-Corps, LLCs, partnerships, and sole proprietorships). The QBI deduction includes a sunset provision scheduled to expire after December 31, 2025, unless extended by future legislation.

To claim the QBI deduction, you must have taxable income below certain thresholds: $197,300 for single filers or $394,600 for married couples filing jointly in 2025. If your income exceeds these thresholds, you enter the 'phase-out' range where limitations based on W-2 wages paid to employees and business assets become relevant. Below the threshold, you can deduct up to 20% of your qualified business income. Above the threshold, the deduction is limited to the LESSER of (1) 20% of your qualified business income, or (2) the GREATER of (a) 50% of W-2 wages paid by the business, or (b) 25% of W-2 wages + 2.5% of UBIA (Unadjusted Basis of Qualified Property) of qualified property. Additionally, if you own a 'specified service trade or business' (SSTB), such as consulting, financial services, or personal services, the income limitations phase out entirely. Calculating the QBI deduction requires detailed tracking of your business income, W-2 wages paid, and the adjusted basis of business assets. The deduction is claimed on Form 8995 or Form 8995-A and must be included on your individual tax return (Schedule 1).

The QBI deduction reduces federal income tax. For example, a self-employed consultant with $100,000 in qualified business income and taxable income below the threshold can deduct $20,000, saving approximately $4,400 to $4,800 in federal taxes (depending on the 22–24% marginal tax bracket). For small business owners structured as S-Corps or LLCs taxed as S-Corps, the combination of limited self-employment tax on distributions and the QBI deduction creates tax savings on the distribution portion. However, the deduction requires documented QBI, W-2 wages, and UBIA tracking to calculate correctly.