What are QBI Deductions and Who Qualifies For Them?

What are QBI Deductions and Who Qualifies For Them?

The One Big Beautiful Bill Act introduced many changes to the tax code for businesses and families alike. Perhaps for business owners, the most impactful change may be the fact that OBBBA removes the sunset and makes QBI deductions permanent.

QBI deductions offer significant tax advantages for eligible business owners by allowing you to deduct up to 20% of qualified income from your taxable income. Seems a bit too good to be true, right? 

In this article, we’ll examine QBI in detail and help you determine if you are eligible and how you can leverage QBI deductions to reduce your tax liability.

What is QBI (Qualified Business Income)?

QBI was first established by the Tax Cuts and Jobs Act of 2017 to provide tax relief to certain business owners; with the passing of OBBBA in July 2025, QBI is here to stay.

The IRS defines Qualified business income (QBI) as “the net amount of qualified items of income, gain, deduction, and loss from any qualified trade or business, including income from partnerships, S corporations, sole proprietorships, and certain trusts.”

Let’s break down each of these components:

• Business Income: Income earned from a qualified trade or business. We’ll cover the types of businesses that are eligible a bit later on.
• Qualified Items: Only certain types of income count as “qualified,” such as ordinary business income, but not investment income or wages. 
• Net Calculation: QBI is calculated as the net total after subtracting business deductions and losses from qualified income.

QBI does not include the following:

• Items that are not properly includable in taxable income
• Investment items such as capital gains or losses
• Interest income not properly allocable to a trade or business
• Wage income (this is significant to note for S-Corp owners!)
• Income that is not effectively connected with the conduct of business within the United States
• Commodities transactions, or foreign currency gains or losses
• Certain dividends and payments in lieu of dividends
• Income, loss, or deductions from notional principal contracts
• Annuities, unless received in connection with the trade or business
• Amounts received as reasonable compensation from an S corporation
• Amounts received as guaranteed payments from a partnership
• Payments received by a partner for services other than in a capacity as a partner
• Qualified REIT dividends
• PTP income

What is the QBI Deduction?

QBI deductions were set up to allow owners of pass-through entities to deduct up to 20% of qualified business income from their taxable income.

What was the taxable profit of your business last year (your share of pass-through income)? If you’re eligible, you can deduct up to 20% of that amount and reduce your tax liability.

There are a few key points to the QBI deductions worth calling out:

• Allows deduction of up to 20% of qualified business income
• Applies to income from qualified trades or businesses
• Created to provide tax benefits to pass-through entities
• Also known as the Section 199A deduction

We’ll cover the specifics for each entity type next, along with more information on who qualifies and restrictions to be aware of.

Who Qualifies for QBI Deductions?

To be eligible for the QBI Deduction, your business must be classified as a pass-through entity, such as a sole proprietorship, partnership, S corporation, or limited liability company (LLC). C corporations do not qualify for this deduction. 

Some trusts and estates can qualify for QBI as well, but for this article, we will focus on the following entity types:

• Sole proprietorships: Sole proprietors and single-member LLCs that are taxed as sole proprietors who file a Schedule C generally qualify for QBI and QBI deductions. There are income restrictions to be aware of though that we’ll cover next.
• Partnerships: Partners in partnerships and members of multi-member LLCs taxed as partnerships generally qualify for QBI. Each partner or member claims their share of QBI on their individual tax return. Guaranteed payments to partners are not included in QBI. 
• S-Corps: S-Corps (or LLCs taxed as S-Corps) may qualify for the QBI deduction on the owner’s share of pass-through business income, but not on W-2 wages paid as reasonable compensation. For example, if you’re an S-corp owner who receives both a W-2 salary and profit allocations, only the business profit (your K-1 share), not your salary, can generate a QBI deduction.

To qualify for QBI, your business must be one of the pass-through entities above and meet the following criteria: 

• You must have qualified business income, which is income generated from your business operations.
• Certain types of businesses have added income restrictions to their QBI Deduction, including specified service trades or businesses (SSTBs) such as law firms, accounting firms, healthcare professionals, and financial services providers.
• Your taxable income determines how the deduction is calculated. Below the threshold, the rules are straightforward; above it, you may still qualify, but wage, property, and SSTB limitations apply.

We’ll cover those thresholds and limitations next.

QBI Limitations and Thresholds

As great as QBI deductions are, there are limitations and restrictions to be aware of. The critical ones we will review are:

• Wage limitations
• Income restrictions
• Specified service trades or businesses

W-2 Wage Limitations

Recall from earlier that QBI applies to non-W-2 income? You may not want to completely neglect paying yourself a W-2 wage for the sake of the deduction.

The IRS also has a wage limitation in place that applies to high-income taxpayers to prevent QBI deductions from solely benefiting those with little to no W-2 wages. These limitations are based on your income and tax filing status. Once you cross certain income limits, then QBI deductions are phased out and subject to a threshold of the greater of:

• 50% of W-2 wages paid by the business, or
• 25% of W-2 wages plus 2.5% of the business’s depreciable property (things like equipment, furniture, or buildings)

While it may be advantageous to pay yourself a lower W-2 wage, at a certain point, this actually limits your QBI deduction. Here’s an example from two companies to illustrate this further:

	Company A	Company B
Profit	$1,000,000	$1,000,000
Max QBI deduction	$200,000	$200,000
W-2 Wages Paid	$100,000	$0
Total depreciable property	$200,000	$200,000
QBI deduction after Wage limitation	$50,000	$5,000

We’ll cover the income restrictions around QBI next.

Income Restrictions

For 2025, the limitations begin to phase in when taxable income (before the QBI deduction) exceeds $197,300 for most filers or $394,600 if you’re married filing jointly. 

Below those thresholds, you generally get the full 20% deduction without the wage limitation or SSTB disallowance. Between $197,300 and $247,300 (other filers) or $394,600 and $494,600 (married filing jointly), the wage/property limits and “Specified Service Trades or Businesses” SSTB rules phase in. 

We’ll cover the SSTB rules in detail next.

Specified Service Trades Or Businesses

Certain types of businesses are subject to additional limits, including specified service trades or businesses (SSTBs) such as law firms, accounting firms, many healthcare professionals, and financial services providers.

If your taxable income is below the threshold, SSTBs are treated like any other qualified trade or business. As your income moves into the phase-out range and above the upper limit, the QBI deduction for SSTBs is phased out and can be eliminated entirely. This is designed intentionally to prevent a consultant or doctor from earning a high income (say, $1,000,000) and reaping the same benefits as a small business. 

The IRS defines an SSTB as “A trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, investing and investment management, trading or dealing in certain assets, or any trade or business where the principal asset is the reputation or skill of one or more of its employees or owners.”

Based on the taxable income limits set for 2025, the SSTB deduction limitations are phased out when the owner’s taxable income exceeds the income threshold amount of $394,600 for married filing jointly and $197,300 for other filers. No deduction is permitted when taxable income exceeds the upper-income threshold amount of $494,600 for married filing jointly and $247,300 for other filers in 2025.

How to Take Advantage of QBI Deductions

To take advantage of this deduction, first determine if you qualify based on your entity type, income limits, and business type.

If you do, then you can either use Form 8995, Qualified Business Income Deduction Simplified Computation, or Form 8995-A, Qualified Business Income Deduction, to report your deduction, or speak with your accountant. The potential for significant tax savings is well worth the effort, should you qualify. 

Are You Leaving Money on the Table for the IRS?

Most business owners we speak to know they’re paying too much in taxes, but they don’t realize there are ways to cut up to $50,000 or more from their tax bill. All you need is a strategic approach to your business and compensation. 

That means taking a look at your:

• Compensation 
• Exit strategy
• Charitable giving
• Investment strategy
• Retirement saving

If you’re overpaying on your taxes, it’s not because your CPA is withholding information from you – it’s because your CPA is focused on filing your forms correctly rather than thinking strategically about your financial plan.

That’s why we’re offering a no-cost evaluation to assess your tax situation. We partner with the best tax advisory firms across the country who can identify your best areas of opportunity in as little as a free 45-minute call.

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All of the above tax information is for information purposes only and is provided to explain the basic tax treatment based on the Internal Revenue Code. Any individual or entity considering any tax strategies should consult with their own CPA or tax/legal advisor who understands their particular tax circumstances and the rules governing their state. In no way is this information intended to be tax or legal advice.