What is Qualified Business Income Deduction?

Good news for business owners: the Qualified Business Income (QBI) deduction, also known as the Section 199A deduction, is here to stay.

Thanks to the One Big Beautiful Bill, officially signed into law by President Donald J. Trump on July 4, 2025, the QBI deduction is now permanent. This landmark legislation removes the sunset clause that was originally set to expire after December 31, 2025, offering small business owners long-term clarity and a powerful, ongoing tax break.

This deduction allows eligible business owners to deduct up to 20% of their qualified business income, thereby significantly reducing their taxable income and enabling them to keep more of what they earn.

Let’s break down how it works, who qualifies, and how to make it part of your broader tax deductions strategy.

What is Qualified Business Income (QBI)?

Qualified Business Income is the net income your business earns from a U.S.-based trade or business, after subtracting regular business expenses but before accounting for items like self-employment tax or retirement contributions.

What QBI Includes:

• Net income from sole proprietorships, partnerships, and S corporations
• Certain types of rental income, if the rental activity qualifies as a business

What QBI Excludes:

• W-2 wages you earn as an employee
• Capital gains and losses
• Foreign currency gains
• Investment income, such as interest and dividends not tied to the business
• Guaranteed payments to partners (fixed payments regardless of profit)

The key here is that the deduction applies only to business income, not personal wages or passive investment returns.

Who is Eligible For the QBI Deduction?

The QBI deduction is available to owners of pass-through entities, meaning businesses where the income flows through to your personal tax return and is taxed at the individual level.

Eligible business structures include:

• Sole proprietorships
• Partnerships
• S corporations
• Certain trusts and estates

If you report business income on your Form 1040, you may qualify, making this a major tax benefit for freelancers, consultants, landlords, and small business owners across the country.

How the Deduction Works (Simplified)

The QBI deduction isn’t as complicated as it sounds—at least not at the basic level. If you qualify, you may be able to deduct up to 20% of your business income right off the top. But your total taxable income, business type, and how much you pay in wages or invest in property can all impact the final amount.

Here’s a simple breakdown of how it works.

Basic Calculation

If you qualify, the QBI deduction allows you to deduct up to 20% of your qualified business income. For example, if your business earns $100,000 in net profit, you could potentially deduct $20,000 from your taxpayer’s taxable income.

Total Taxable Income Limit

Your total taxable income (including all sources) determines whether you get the full deduction or if limitations apply. The deduction cannot exceed 20% of your total taxable income, excluding net capital gains.

2025 Income Thresholds

Your eligibility falls into one of three categories:

1. If your taxable income falls below the threshold: You’ll generally qualify for the full 20% QBI deduction—no strings attached.
2. If your taxable income is in the phase-in range: Your deduction may be limited based on W-2 wages paid and/or qualified property held by the business.
3. If your taxable income exceeds the upper limit: You may lose some or all of the deduction, especially if your business is in a Specified Service Trade or Business (SSTB).

Important Limitations

While the qualified business income deduction is a powerful tax break, it does come with some fine print. Certain types of businesses and higher-income earners may face limits on how much they can deduct or whether they can claim the deduction at all.

Specified Service Trade or Business (SSTB)

Certain industries are subject to extra rules. If your business is in a Specified Service Trade or Business—think law, health, accounting, consulting, and similar professions—your eligibility for the deduction is more limited.

• Below the income threshold: SSTBs qualify for the full deduction.
• In the phase-out range: The deduction starts to shrink.
• Above the upper limit: SSTBs may no longer qualify for the deduction at all.

This is where taxable income limits really matter. If your taxable income exceeds the limit, the QBI deduction may vanish for SSTB owners.

W-2 Wages and Qualified Property

For business owners whose taxable income exceeds the IRS thresholds, the full QBI deduction might still be available, but only if your business meets certain requirements tied to W-2 wages and qualified property.

Here’s how it works:

To determine your maximum deduction, the IRS applies one of the following formulas:

1. 50% of W-2 wages paid by the business, or
2. 25% of W-2 wages plus 2.5% of the unadjusted basis of qualified property

Let’s break that down:

• W-2 wages include the total wages your business pays to employees, not independent contractors.
• Qualified property refers to tangible business assets (like buildings, machinery, or equipment) that are still within their depreciation period.

This means if you’re a high earner and want to maintain the full QBI deduction, you may need to either:

• Hire employees and pay W-2 wages, or
• Invest in qualifying business property

For example, let’s say your business pays $200,000 in W-2 wages and owns $500,000 in qualified property. Under the second formula, you could potentially claim a QBI deduction of up to:

• 25% of $200,000 = $50,000
• Plus 2.5% of $500,000 = $12,500
• Total possible deduction: $62,500 (if your QBI and taxable income allow for it)

Understanding how these formulas apply can make a big difference in how much you’re able to deduct on your personal tax return, especially for those with higher taxpayers’ taxable income.

Action Steps for Business Owners

The One Big Beautiful Bill just gave small business owners a huge gift: long-term clarity.

Because the QBI deduction is now permanent, your 2025 tax planning (and beyond) just got a lot more strategic. Here’s what you can do next.

1. Track the Right Numbers

If you want to take full advantage of the qualified business income deduction, it starts with good bookkeeping. You need to be tracking the right figures throughout the year, not just scrambling to pull them together at tax time.

Specifically, keep detailed records of:

• Net income from your qualified trade or business: This is the core of your QBI calculation. It’s your revenue minus ordinary business expenses.
• W-2 wages paid to employees: These may impact your deduction if your income exceeds IRS thresholds.
• Your qualified property and its unadjusted basis: This includes any equipment, buildings, or assets still within their depreciation window.
• Capital gains and foreign currency gains: These are excluded from QBI and could limit how much of your total taxable income qualifies.

Without clean, accurate records, you may miss out on deductions—or worse, face IRS scrutiny. A little organization now can result in thousands in savings later.

2. Know Your Income Level

Where your taxable income falls plays a major role in determining whether you get the full deduction or face restrictions.

Here’s a simplified breakdown:

• If your taxable income falls below the threshold (set annually by the IRS): You’ll generally qualify for the full 20% deduction with no added calculations.
• If your taxable income exceeds the threshold: You’ll need to apply either the W-2 wage limit or the wage/property formula, and the rules get more complex, especially for specified service trades or businesses (SSTBs).

You may be able to shift income, defer revenue, or accelerate expenses to stay within a favorable range and keep more money in your pocket.

3. Structure Strategically

The way your business is structured can have a big impact on how much of the QBI deduction you can claim. If you’re operating as a sole proprietorship, consider whether switching to an S corporation could offer more control. S-Corp owners can pay themselves a reasonable W-2 wage and take the rest of their earnings as pass-through income, which may open the door to a more favorable deduction.

Also, take a close look at any guaranteed payments to partners. These fixed payments (often for services or capital) are excluded from qualified business income, which can shrink your deduction if not managed carefully.

Make the Most of the Qualified Business Income Deduction

With the passage of the One Big Beautiful Bill, the qualified business income deduction is no longer a temporary tax perk—it’s a permanent and powerful part of the Internal Revenue Code. And for small business owners, it offers a real opportunity to lower your federal income tax liability each year.

But like any good tax strategy, the details matter. From taxable income limits to qualified property calculations, there are plenty of moving parts to get right, and big savings if you do.

Want to make sure you’re getting every dollar you’re entitled to? Let us take a closer look at your situation and build a custom strategy that helps you maximize the qualified business income deduction.