QBI Deduction: Maximize Your 20% Business Tax Break

The Qualified Business Income (QBI) deduction allows many business owners to deduct up to 20% of their business income on their personal tax return, significantly reducing federal income taxes.
Maximizing this deduction requires careful tax planning, especially if your income approaches the IRS phaseout limits.

IRS Tax Code Reference

The QBI deduction is authorized under:

• Internal Revenue Code (IRC) §199A  Qualified Business Income Deduction.

Relevant IRS Forms:

• Form 8995  Qualified Business Income Deduction Simplified Computation
• Form 8995-A  Qualified Business Income Deduction (full form for complex cases)

What Is the QBI Deduction?

The QBI deduction allows owners of pass-through businesses  including sole proprietors, LLCs, S corporations, and partnerships  to deduct up to 20% of their qualified business income.

It applies to domestic businesses, not C corporations, and is available whether you itemize deductions or take the standard deduction.

Who Qualifies?

You qualify if:

• You have income from a qualified trade or business (not a C corporation).
• Your taxable income is below certain thresholds:
  • $191,950 for single filers in 2025
  • $383,900 for married filing jointly in 2025

Above these limits, phaseouts and additional restrictions apply, especially for Specified Service Trades or Businesses (SSTBs) like law, accounting, consulting, etc.

How to Maximize Your QBI Deduction

1. Keep Taxable Income Below Thresholds

If your total taxable income (before the QBI deduction) is below the thresholds, you qualify for the full 20% deduction without complex calculations.

Strategies to lower taxable income:

• Make larger retirement contributions (e.g., Solo 401(k), SEP IRA).
• Accelerate deductible business expenses into the current year.
• Contribute to a Health Savings Account (HSA).

2. Understand the SSTB Rules

If you are in a Specified Service Trade or Business (SSTB) (lawyer, accountant, doctor, consultant, etc.), the QBI deduction phases out completely above income thresholds.

Planning income and deductions carefully can help stay within limits and preserve the deduction.

3. Optimize W-2 Wages and Business Assets (For High-Income Businesses)

If you exceed income thresholds, your QBI deduction may be limited to:

• 50% of W-2 wages, or
• 25% of W-2 wages + 2.5% of unadjusted basis of qualified property.

Thus:

• Pay yourself or employees reasonable W-2 wages.
• Keep depreciable business assets to support the 2.5% calculation.

4. Separate Multiple Businesses (Aggregation)

If you own multiple businesses, the IRS allows “aggregation” under certain rules. Grouping profitable and less profitable businesses can help maximize the deduction.

Aggregation requires meeting specific criteria and should be documented clearly on Form 8995 or Form 8995-A.

Example:

Scenario:

• Net business income: $150,000
• Filing Status: Married Filing Jointly
• Taxable income after deductions: $180,000

Result:

• Eligible for full QBI deduction:
  20% × $150,000 = $30,000 deduction.

This reduces taxable income by $30,000 without needing to itemize deductions.

Step-by-Step Compliance Checklist

1. Calculate your taxable income and assess if under the threshold.
2. Complete Form 8995 if simplified, or Form 8995-A if more complex.
3. Track W-2 wages paid and business property basis if above thresholds.
4. Consider retirement and HSA contributions to reduce taxable income.
5. Document your business activities properly to defend your deduction if audited.

Important Points to Remember

• Rental real estate may qualify for QBI if it rises to the level of a “trade or business” under IRS safe harbor rules.
• The QBI deduction does not reduce self-employment tax.
• Income from capital gains, dividends, and interest does not qualify for QBI.

Conclusion

Maximizing your QBI deduction requires proactive income management, careful business structuring, and precise tax filing.
Failing to plan can mean losing a valuable 20% deduction  unnecessarily increasing your tax bill.

Schedule a meeting with Anshul Goyal, CPA to develop a personalized QBI optimization strategy for your 2025 taxes:
https://calendly.com/anshulcpa/

FAQs

Q1: Do I have to itemize deductions to claim QBI?
No, the QBI deduction is allowed even if you take the standard deduction.

Q2: Can rental income qualify for QBI?
Yes, if it meets the IRS definition of a trade or business.

Q3: How do W-2 wages affect the QBI deduction?
Above income thresholds, W-2 wages can limit or enhance the deduction amount.

Q4: What happens if my income is above the QBI limit?
Your deduction could be reduced or eliminated, depending on business type and W-2 wages/assets.

Q5: Is the QBI deduction available for C corporations?
No, only pass-through businesses like sole proprietors, partnerships, S corps, and LLCs qualify.

About Our CPA

Anshul Goyal, CPA, EA, FCA, is a licensed Certified Public Accountant in the United States. He represents clients before the IRS as an Enrolled Agent and specializes in business tax planning, QBI optimization, and cross-border tax strategies.