Qualified Business Income (QBI) Deduction
The Qualified Business Income (QBI) deduction allows owners of pass-through businesses to deduct up to 20% of their qualified business income from their taxable income.
Introduced by the Tax Cuts and Jobs Act in 2018, the QBI deduction (also called the Section 199A deduction) gives pass-through business owners a deduction of up to 20% of their qualified business income. This effectively reduces the top tax rate on business income from 37% to 29.6%.
The deduction is available to sole proprietors, S-Corp shareholders, LLC members, and partners. It applies to domestic business income — not wages, capital gains, or investment income.
For taxpayers below the income threshold ($191,950 single / $383,900 married filing jointly in 2025), the full 20% deduction is available regardless of business type. Above these thresholds, limitations kick in based on W-2 wages paid and the business's qualified property.
Specified service trades or businesses (SSTBs) — including law, medicine, accounting, consulting, and financial services — face additional restrictions. Above the income thresholds, the QBI deduction for SSTBs is reduced and eventually eliminated entirely.
The QBI deduction is set to expire after 2025 unless Congress extends it. Strategic tax planning around the potential expiration can help business owners maximize this benefit while it's available.
Practical Example
A plumbing business owner has $250,000 in qualified business income. Their QBI deduction is $50,000 (20% of $250,000). At a 24% marginal tax rate, this saves them $12,000 in federal income taxes. The deduction is taken on their personal return — no itemizing required.