What is the Qualified Business Income (QBI) Deduction?
The Qualified Business Income Deduction, also known as the Section 199A deduction, is a federal income tax deduction that allows eligible self-employed individuals and small business owners to deduct up to 20% of their qualified business income on their personal tax return.
It was created under the Tax Cuts and Jobs Act (TCJA) in 2017 and is currently set to expire after 2025 unless extended by Congress.
In Simple Terms: If you own a small business or are self-employed, the QBI deduction lets you reduce your taxable income—potentially by thousands of dollars—without itemizing deductions.
Who Qualifies?
You may qualify if you have income from a pass-through entity, such as:
- Sole proprietorship (Schedule C)
- Partnership
- S Corporation
- LLC taxed as any of the above
- Some trusts and estates
You don’t qualify if your income comes from a C corporation or wages as an employee.
What is "Qualified Business Income"?
Qualified Business Income (QBI) includes:
- Net Income from your business
- Only domestic (U.S) income
- After expenses, but before deductions like
- Self-employment tax
- Retirement Contributions
- Health Insurance
Qualified Business Income does NOT include:
- Capital gains/losses
- Dividends
- Interest Income (unless part of the business)
- Wages paid to yourself
- Wages from C Corporations
How Much Can You Deduct?
You can deduct up to 20% of your QBI—but it depends on:
- Your total taxable income
- Whether your business is a Specified Service Trade or Business (SSTB)
- Whether your business pays W-2 wages or owns qualified property
Income Limits (2025 tax year):
| Filing Status | Full Deduction Below | Phase-Out range Ends |
|---|---|---|
| Single | $182,100 | $232,100 |
| Married Filing Jointly | $364,200 | $464,200 |
If your taxable income is below the threshold → Full 20% deduction
If it’s above, restrictions apply based on:
- Type of business (SSTB or not)
- W-2 wages paid
- Property owned by the business
Specified Service Trade or Business (SSTB)
If you're in one of these fields, your QBI deduction phases out above the income limit:
- Health (e.g., doctors, dentists)
- Law
- Accounting
- Consulting
- Financial Services
- Athletics, Performing Arts
- Any business where the principle asset is the reputation or skill of one or more employees
Example:
You’re a sole proprietor with:
- $100,000 net income (QBI)
- Below the income limit
QBI Deduction = 20% of $100,000 = $20,000
So, you’ll pay income tax on $80,000 instead of $100,000.