This article may contain references to products or services from one or more of our advertisers or partners. We may receive compensation when you click on links to those products or services. Nonetheless, our opinions are our own.
The information presented in this article is accurate to the best of our knowledge at the time of publication. However, information is subject to change, and no guarantees are made about the continued accuracy or completeness of this content after its publication date.
- QBI Deduction Basics and Components
- What It Is and How It Works
- What Qualified Business Income Includes
- Main Components of the QBI Deduction
- Who Qualifies for the QBI Deduction
- How Filing Status Affects Your Deduction
- How to Maximize Your QBI Benefits
- Advanced Rules for Multiple Businesses and Special Income
- Common Errors That Reduce the QBI Deduction
- Business Structures and QBI Implications
- Final Thoughts
- Frequently Asked Questions
- Recommended Reads
QBI Deduction Basics and Components
The Qualified Business Income (QBI) deduction, also called Section 199A, allows eligible business owners to deduct up to 20% of their QBI on taxes. This deduction, introduced by the Tax Cuts and Jobs Act (TCJA), provides significant tax relief for small and medium-sized businesses. Factors such as business type, income, and whether your business is a Specified Service Trade or Business (SSTB) affect eligibility. Knowing your filing status and relevant income limits is essential to maximizing this deduction. Consulting a tax professional ensures you meet the qualifications and optimize your benefits.
What It Is and How It Works
According to the IRS, dated July 2025, the Qualified Business Income (QBI) deduction, also called the Section 199A deduction, lets many small business owners deduct up to 20% of their business income on their taxes (IRS, 2025). This includes owners of sole proprietorships, partnerships, S corporations, and some trusts and estates. QBI generally means your net business income after expenses, but it doesn’t include things like capital gains, interest, dividends, or your own salary (Cornell Law School, n.d.; TaxAct Blog, 2025). The deduction has two parts: one is based on your business income, and the other is for special income like REIT dividends or publicly traded partnership (PTP) earnings, which follow slightly different rules (IRS, 2025; TaxAct Blog, 2025). In the end, your total QBI deduction can’t be more than 20% of your taxable income, not counting capital gains (IRS, 2025).
What Qualified Business Income Includes
Qualified Business Income (QBI) refers to the net income you earn from your business after subtracting expenses. However, not all income qualifies as QBI. Investment income such as capital gains, dividends, and interest is generally excluded from QBI. Qualified property, which includes physical assets your business owns that depreciate over time, may also influence the deduction. If your income exceeds certain thresholds, your QBI deduction can be affected by wages paid to employees and the unadjusted basis of qualified property.
Main Components of the QBI Deduction
The QBI deduction is comprised of two components:
- QBI Component: Deduction of up to 20% of qualified business income based on wages paid and qualified property owned.
- REIT/PTP Component: Deduction of 20% on qualified dividends from Real Estate Investment Trusts (REITs) and Publicly Traded Partnerships (PTPs).
The total deduction is limited to the smaller of either 20% of QBI and REIT/PTP qualified income combined or 20% of your taxable income excluding net capital gains.
Who Qualifies for the QBI Deduction
Eligible businesses include pass-through entities such as sole proprietorships, partnerships, LLCs taxed as partnerships, S corporations, and certain trusts and estates. C corporations and employee wages are not eligible. If your business is classified as an SSTB, like those in healthcare or law, your income levels will determine if you qualify. For SSTBs, the deduction phases out between specific income ranges depending on your filing status:
- Single filers: Phase-out begins at $182,100 and ends at $232,100.
- Married filing jointly: Phase-out begins at $364,200 and ends at $464,200.
Voted "Best Overall Budgeting App" by Forbes and WSJ
Monarch Money helps you budget, track spending, set goals, and plan your financial future—all in one app.
Get 50% OFF your first year with code MONARCHVIP
How Filing Status Affects Your Deduction
Your filing status determines how much income you can earn before the QBI deduction begins to phase out. Single filers have lower thresholds, which may reduce or eliminate the deduction at higher income levels. Married couples filing jointly benefit from higher thresholds but may still face reductions depending on their combined income. The QBI deduction effectively lowers your tax rate. For example, someone in the 24% bracket could see a reduced effective rate of 19.2%, while someone in the 12% bracket could see a rate as low as 9.6%.
How to Maximize Your QBI Benefits
Step 1: Preparing Financial Documents
To maximize the deduction, start by calculating your adjusted gross income (AGI) and gathering all records related to your business income, expenses, and any W-2 wages paid. Accurate documentation ensures you correctly calculate the deduction and support your claims if audited.
Step 2: Consulting a Tax Expert
Working with a qualified tax professional can help you determine eligibility and find ways to structure your business to take full advantage of the QBI deduction. Tax professionals can also uncover additional strategies to reduce your taxable income and ensure compliance with IRS rules.
Advanced Rules for Multiple Businesses and Special Income
If you operate multiple businesses, you may be able to aggregate them for QBI purposes under IRS regulation Section 1.199A-4. Aggregating allows you to combine income and losses, potentially maximizing your deduction. However, the rules for aggregation are complex and require detailed review and documentation. Additionally, income from REIT dividends and PTPs is eligible for the deduction without being subject to the same wage and property limitations as other types of business income.
Common Errors That Reduce the QBI Deduction
One of the most frequent mistakes is misclassifying your business as an SSTB when it isn’t or failing to identify that your business falls under this classification. Incorrect application of aggregation rules is another common issue, which can lead to lower deductions or missed opportunities. Failing to maintain accurate documentation or misunderstanding eligible income types can also negatively impact your tax return.
Business Structures and QBI Implications
Business structure plays a significant role in QBI eligibility. Sole proprietorships, partnerships, and S corporations pass income through to owners and generally qualify for the QBI deduction. In contrast, C corporations are excluded from this benefit due to their separate taxation model. Choosing the right structure can influence the deduction and should be considered during tax planning or business formation.
Final Thoughts
The Qualified Business Income deduction can provide substantial tax savings for business owners who meet the eligibility criteria. Understanding the rules around SSTBs, income thresholds, and business structure is key to taking full advantage of the benefit. With proper documentation and expert advice, the QBI deduction can be a powerful tool in your tax strategy. Business owners should monitor potential legislative changes, as the deduction is currently set to expire in 2025 unless extended. Making informed choices today can lead to significant savings in the long run.
Frequently Asked Questions
What are the most common mistakes when calculating QBI?
Common mistakes include misclassifying a business as an SSTB or failing to apply aggregation rules properly. Errors also occur when including income that does not qualify, such as capital gains or interest income. Failing to consult a tax expert can lead to misinterpretation of the complex rules surrounding QBI. These mistakes can significantly reduce or eliminate the deduction.
Can rental real estate income qualify for QBI?
Yes, rental real estate income may qualify for the QBI deduction if it meets the criteria of a trade or business under IRS guidelines. This typically includes regular and continuous rental activity. Proper documentation and recordkeeping are essential to support qualification. In some cases, a safe harbor rule may apply to make qualification easier.
How does QBI affect self-employment tax?
The QBI deduction reduces your taxable income for federal income tax purposes but does not directly affect self-employment tax. Self-employment tax is calculated on your net earnings, not adjusted for the QBI deduction. Therefore, while your overall income tax liability may decrease, your self-employment tax obligations remain unchanged. It’s important to plan accordingly.
Is QBI applicable to online businesses?
Yes, online businesses can qualify for the QBI deduction if they are structured as eligible entities and operate as a trade or business. As long as the income is derived from regular business activities and meets the IRS standards, it is considered QBI. The same rules regarding SSTBs, income limits, and documentation apply. Consulting a tax expert helps ensure accurate qualification.
What changes should taxpayers expect in the future?
The QBI deduction is scheduled to sunset in 2025 unless extended by Congress. If no legislative action is taken, eligible taxpayers may no longer receive this benefit beyond that year. Future changes could also involve new income thresholds, expanded definitions, or restrictions. Staying informed on tax law updates is essential for strategic planning and compliance.
Reviewed and edited by Albert Fang.
See a typo or want to suggest an edit/revision to the content? Use the contact us form to provide feedback.
At FangWallet, we value editorial integrity and open collaboration in curating quality content for readers to enjoy. Much appreciated for the assist.
Did you like our article and find it insightful? We encourage sharing the article link with family and friends to benefit as well - better yet, sharing on social media. Thank you for the support! 🍉
Article Title: Qualified Business Income Deduction: How It Works and Who Benefits
https://fangwallet.com/2025/08/08/qualified-business-income-deduction-how-it-works-and-who-benefits/The FangWallet Promise
FangWallet is an editorially independent resource - founded on breaking down challenging financial concepts for anyone to understand since 2014. While we adhere to editorial integrity, note that this post may contain references to products from our partners.
The FangWallet promise is always to have your best interest in mind and be transparent and honest about the financial picture.
Become an Insider
Subscribe to get a free daily budget planner printable to help get your money on track!
Make passive money the right way. No spam.
Editorial Disclaimer: The editorial content on this page is not provided by any of the companies mentioned. The opinions expressed here are the author's alone.
The content of this website is for informational purposes only and does not represent investment advice, or an offer or solicitation to buy or sell any security, investment, or product. Investors are encouraged to do their own due diligence, and, if necessary, consult professional advising before making any investment decisions. Investing involves a high degree of risk, and financial losses may occur including the potential loss of principal.
Source Citation References:
+ Inspo
Internal Revenue Service. (2025, July). Qualified business income deduction. https://www.irs.gov/newsroom/qualified-business-income-deduction
Cornell Law School. (n.d.). 26 U.S. Code § 199A – Qualified business income. https://www.law.cornell.edu/uscode/text/26/199A
