The Qualified Business Income deduction lets pass-through owners deduct up to 20% of their business income from federal taxable income. Created by the 2017 TCJA and made permanent under the One Big Beautiful Bill Act, it rewards owners of sole proprietorships, partnerships, S-corporations, and most LLCs — but the rules tighten sharply at higher income.
Who Qualifies
QBI is the net income from a qualified trade or business operated as a pass-through. The deduction is taken on Form 1040 whether or not the owner itemizes. QBI does not include W-2 wages, reasonable compensation paid to an S-corp owner, guaranteed payments to a partner, capital gains, dividends, or most interest income.
Below the threshold
If taxable income is below $197,300 (single) / $394,600 (MFJ) for 2025, the deduction is simply 20% of QBI with almost none of the limitations applying. Most small business owners fall here.
The Three Scenarios
The complexity is entirely a function of taxable income. Below the threshold, it's 20% of QBI, full stop — even for service businesses. In the $50K (single) / $100K (MFJ) phase-in range above it, the wage and property limits phase in and service businesses begin to phase out. Above the upper limit, the full wage/property cap applies and specified service businesses lose the deduction entirely.
| Scenario | QBI | Taxable Income | Deduction |
|---|---|---|---|
| Single, below threshold | $120,000 | $160,000 | $24,000 (20% of QBI) |
| MFJ, below threshold | $200,000 | $350,000 | $40,000 (20% of QBI) |
| SSTB, above threshold | $300,000 | $520,000 | $0 (phased out) |
| Non-SSTB, above threshold | $400,000 | $600,000 | Limited by W-2 wages / property |
Specified Service Businesses (SSTBs)
Health, law, accounting, consulting, financial services, performing arts, athletics — fields where the principal asset is the reputation or skill of the owners — are SSTBs. For an SSTB the deduction is full below the threshold, partial in the phase-in range, and zero above it. A non-SSTB (manufacturer, contractor, retailer) is never disqualified by type; above the threshold it's simply capped by W-2 wages and qualified property.
Planning Around the Threshold
- Retirement contributions reduce taxable income dollar-for-dollar — potentially restoring a deduction worth up to 20% of QBI
- Income timing — defer income or accelerate deductible expenses to stay below the threshold
- For S-corps, the salary/distribution split affects QBI and the wage-limitation test
- Charitable contributions and HSA funding both reduce taxable income and can be timed
Pro tip
A retirement contribution made to drop below the QBI threshold produces a double benefit: the contribution is deductible, and it restores a QBI deduction worth up to 20% of business income. The combined marginal benefit of that single dollar can far exceed its face value — run the numbers before year-end.
SMAART Tax Team
CPAs & Enrolled Agents, SMAART Tax
