Introduction
The Qualified Business Income (QBI) Deduction, introduced under the Tax Cuts and Jobs Act (TCJA) of 2017, allows eligible business owners to deduct up to 20% of their qualified business income. This deduction, governed by IRC § 199A, is available to pass-through entities such as sole proprietors, partnerships, S corporations, and some trusts and estates.
Qualifying for the QBI deduction can significantly reduce taxable income, but it comes with income limits, phase-outs, and specific rules. This guide explains who qualifies, how to calculate the deduction, and steps to maximize tax savings in 2025.
Who Qualifies for the QBI Deduction?
To claim the QBI deduction, your business must meet the following criteria:
- Must be a Pass-Through Entity
- Sole proprietorships (Schedule C, Form 1040)
- Partnerships (Form 1065, K-1)
- S corporations (Form 1120-S, K-1)
- Some real estate investors and REIT dividends
- Income Thresholds for 2025
- Full deduction if taxable income is below:
- $200,000 (Single, Head of Household, MFS)
- $400,000 (Married Filing Jointly)
- Partial deduction with phase-out if income exceeds these limits.
- Certain service-based businesses (SSTBs) have additional restrictions
- Specified Service Trade or Business (SSTB) includes: doctors, lawyers, accountants, consultants, financial advisors, and entertainers (IRC § 199A(d)(2)).
- SSTBs lose the deduction entirely if income exceeds the upper threshold ($250,000 single/$500,000 married filing jointly).
How to Calculate the QBI Deduction
The deduction is generally 20% of QBI, but it depends on income level and W-2 wages paid by the business.
Step 1: Determine Qualified Business Income (QBI)
QBI includes net business income from a pass-through entity, excluding:
- Capital gains and losses
- Dividends
- Interest income (unless from a lending business)
- Reasonable compensation for S corporation owners
Example Calculation:
| Income Source | Amount ($) |
|---|---|
| Net Business Income (Schedule C) | $100,000 |
| Capital Gains | $5,000 |
| Interest Income | $2,000 |
| Qualified Business Income (QBI) | $100,000 |
Step 2: Apply the 20% QBI Deduction
- 20% of $100,000 = $20,000
- Deduction is limited if taxable income exceeds thresholds
Step 3: W-2 Wage and Property Limitation (For High-Income Taxpayers)
If taxable income exceeds $200,000 (single) or $400,000 (married filing jointly), the deduction is limited to:
- 50% of W-2 wages paid by the business, OR
- 25% of W-2 wages + 2.5% of qualified business property (UBIA – unadjusted basis immediately after acquisition)
Example:
- QBI = $500,000
- W-2 Wages Paid = $120,000
- 50% of W-2 wages = $60,000
- QBI deduction is limited to $60,000 instead of $100,000
How to Maximize the QBI Deduction
1. Keep Taxable Income Below Thresholds
- Contribute to a 401(k) or SEP IRA to reduce taxable income.
- Deduct self-employed health insurance (IRC § 162(l)).
2. Pay Yourself W-2 Wages (If an S Corp Owner)
- S corporations should pay reasonable compensation to qualify for wage-based limitations.
3. Aggregate Multiple Businesses (If Eligible)
- If multiple businesses are related and share common ownership, they may be aggregated for higher deduction benefits (Treasury Regulation § 1.199A-4).
4. Convert from an SSTB to a Non-SSTB
- If you own a service-based business, separate non-SSTB activities (e.g., selling products vs. consulting).
5. Utilize Real Estate Investment Trust (REIT) Dividends and PTP Income
- REIT dividends and Publicly Traded Partnership (PTP) income qualify for QBI even without owning a business.
IRS Forms & Compliance Checklist
- Form 1040, Line 13 – QBI deduction
- Schedule C (Form 1040) – Sole proprietors report net business income
- Schedule E (Form 1040) – Rental property income that may qualify
- Form 1065 (Partnerships) & Form 1120-S (S Corporations) – Pass-through entity reporting
- Form 8995 (Simplified) or Form 8995-A (Complex) – Calculate QBI deduction
Conclusion
The Qualified Business Income (QBI) deduction is a powerful way for small business owners to lower taxable income. By understanding income thresholds, W-2 wage limitations, and business structuring strategies, you can maximize this deduction.
For expert guidance on structuring your business to optimize QBI deductions, schedule a consultation with Anshul Goyal, CPA EA FCA, a licensed tax professional and IRS representative.
Frequently Asked Questions (FAQs)
1. Who qualifies for the QBI deduction?
Sole proprietors, partnerships, S corporations, and some trusts and estates qualify. C corporations do not qualify for QBI.
2. Do rental property owners qualify for QBI?
Rental income may qualify if the property is managed as a trade or business. Passive rental income does not qualify.
3. Can I claim the QBI deduction if I am over the income threshold?
Yes, but limitations apply. You must meet the W-2 wage or UBIA property test to claim any deduction.
4. Does QBI include capital gains?
No, capital gains, interest, and dividends are excluded from QBI.
5. Do I need to file Form 8995 for QBI?
Yes, taxpayers with QBI must complete Form 8995 or Form 8995-A to calculate the deduction.
About Our CPA
Anshul Goyal, CPA EA FCA is a licensed Certified Public Accountant in the United States and an IRS Enrolled Agent (EA). He specializes in tax litigation, cross-border taxation, and IRS compliance, helping American businesses and Indian expats with IRS matters.
Schedule a consultation today with Anshul Goyal, CPA, for personalized tax planning.