How to Calculate the QBI Deduction (With Examples)

For many self-employed individuals, the Qualified Business Income deduction can feel like one of the most confusing breaks in the tax code — yet it is also one of the most meaningful. This deduction, created under the Tax Cuts and Jobs Act, potentially allows certain business owners to reduce the taxable portion of their income.

If you run a small business, manage rental properties, or earn side income from freelance work, understanding how this deduction works could make a noticeable difference at tax time. The process may look complex at first glance, but once you break it down, it generally follows a clear, step-by-step structure.

In this guide, you will learn who typically qualifies, how the math is organized, and what steps to take before you calculate your own deduction. 

📌 Also read: Top 20 Tax Deductions Every Freelancer Should Know for 2026 Taxes

How to Qualify for the QBI Deduction

Before diving into calculations, make sure your income and business structure meet the core eligibility requirements. The Qualified Business Income deduction typically applies to owners of pass-through entities (such as sole proprietorships, partnerships, and S corporations) as well as certain trusts and estates. These entities “pass through” their income to owners, who may then be eligible for a deduction of up to 20% of qualifying business income on their individual tax returns.

Income from C corporations or regular wages earned as an employee are not considered eligible. However, other income types, such as qualified REIT dividends and qualified publicly traded partnership (PTP) income, may count toward the deduction if they meet specific IRS criteria.

If you earn rental income, the IRS provides a safe harbor rule that allows certain real estate activities to qualify as a trade or business, provided that recordkeeping and hour-of-service conditions are satisfied.

Key Terms You Will Encounter

A few definitions form the foundation of every QBI calculation. Understanding them before you begin will make the later steps easier to follow.

What to Gather Before You Calculate

Organizing your paperwork early can prevent missteps later. Here are the most common documents you will need:

✅ Schedule K-1s — From partnerships, S corporations, or trusts showing your share of income, W-2 wages, and UBIA information.

✅ Employer payroll reports — For S corporations, this confirms wages paid that tie directly to the business.

✅ UBIA property details — Include acquisition dates and original basis for depreciable property used in the trade or business.

✅ Net capital gain data — Needed because the final deduction cannot exceed 20% of taxable income after subtracting net capital gains.

✅ Carryforwards and aggregation statements — Prior-year QBI losses or aggregation elections must be factored in.

✅ Filing status and total taxable income — Determines whether you qualify for the simplified (Form 8995) or detailed (Form 8995-A) computation.

📝 Note: Keeping these figures in one place, preferably alongside your tax return worksheets, makes it easier to test eligibility and confirm accuracy before moving on to the computation step. 

The QBI Calculation (Fast Path vs. Advanced Path)

Once you confirm that your business income qualifies, the next step is to calculate how much of it can be deducted. The Qualified Business Income deduction follows a clear sequence. Your path depends mainly on your taxable income and whether your business involves a specified service field.

Start by checking your taxable income against the latest threshold in the IRS instructions.

✅ If your taxable income is at or below the threshold, you can use Form 8995 (Simplified Computation).
✅ If your taxable income is above the threshold or your business is subject to the SSTB limits, W-2 wage limits, UBIA adjustments, or aggregation rules, you must use Form 8995-A (Advanced Computation).

📝 Note: Always confirm the latest income thresholds and instructions in the current-year IRS guidance before you begin. These numbers adjust annually for inflation.

Step 1. Start with Your QBI

Determine your qualified business income for each trade or business. This includes all qualified items of income, gain, deduction, and loss that are effectively connected with a U.S. trade or business. Subtract any prior-year QBI loss carryforwards. The result becomes your base QBI amount.

This step ensures you only include income that counts toward the deduction. The operational definitions and adjustments appear in the official Form 8995 or Form 8995-A instructions and the Treasury regulations under IRC Section 199A.

Step 2. Apply the 20% Rule (Base Deduction)

Compute 20% of your QBI.

If you also have qualified REIT dividends or qualified publicly traded partnership (PTP) income, calculate 20% of those separately and add them to your total.

The combined deduction cannot exceed 20% of your taxable income after subtracting any net capital gain. At this point, you compare both figures — the business-based amount and the overall income-based cap — and use the smaller value.

📝 Note: The IRS overview for Form 8995 describes this comparison clearly, showing how the deduction interacts with your overall taxable income.

Step 3. If Over the Threshold, Apply the Limits (Form 8995-A)

If your taxable income is higher than the IRS threshold, you need to test your results against the wage and property limits and, if relevant, the SSTB phase-out rules.

Wage and Property Limitation

For each trade or business, your allowable QBI amount may be limited to the greater of:

The IRS regulations and revenue procedures explain what qualifies as W-2 wages and how to compute these amounts.

SSTB Phase-Out

If your business operates in a Specified Service Trade or Business (SSTB) such as law, medicine, or consulting, the deduction may phase out once your income passes the threshold. The phase-out occurs gradually over a defined range. Beyond the upper limit, the SSTB portion of your QBI may not qualify at all.

Aggregation and Multiple Businesses

Some taxpayers operate more than one trade or business. The regulations allow aggregation under specific ownership and integration criteria. Aggregating businesses can simplify calculations and affect how wage, property, and loss limits are applied. The rules for this are detailed in the IRC Section 199A regulations and should be reviewed carefully before filing.

Step 4. Compare and Cap

After applying any limitations, compare your final deduction to the overall cap of 20% of taxable income minus net capital gain. The smaller of these two amounts becomes your Qualified Business Income deduction. This comparison applies to both simplified and advanced computations.

QBI Deduction Examples You Can Follow

The Qualified Business Income deduction follows the same logic in every case . You start with QBI, apply the 20% base rule, and compare it to your overall income cap. What changes is the level of complexity once you cross the IRS income thresholds.

Below are three simplified examples that show how the math typically works. Each example walks through the inputs, calculation steps, and final result. Figures are hypothetical and for educational purposes only. Always use your current tax year’s IRS forms and instructions when preparing an actual return.

Scenario 1: Sole Proprietor Below the Threshold (Form 8995)

✏️ Hypothetical Example:

A self-employed graphic designer reports Qualified Business Income (QBI) of $80,000. Their taxable income before the QBI deduction is $120,000, which includes $5,000 of net capital gain. There are no REIT or PTP items and no QBI loss carryforward from a prior year.

Step 1. Determine QBI

Net QBI = $80,000

Step 2. Calculate the Base Deduction

20% × $80,000 = $16,000

Step 3. Check the Overall Income Cap

Taxable income before QBI deduction ($120,000) minus net capital gain ($5,000) = $115,000
20% × $115,000 = $23,000

Step 4. Take the Lesser of the Two Amounts

$16,000 (QBI-based) vs. $23,000 (income-based) → $16,000 deduction

📝 Note: You can find these steps reflected on Form 8995 lines 2–5 and 10–15. The IRS calls this the “simplified path” since no wage or property limits apply below the threshold.

Scenario 2: S Corporation Above the Threshold with W-2 Wages and UBIA (Form 8995-A)

✏️ Hypothetical Example:

A single taxpayer has taxable income of $300,000 before the QBI deduction. Their S corporation passes through $200,000 in QBI, $50,000 in W-2 wages, and $400,000 in unadjusted basis immediately after acquisition (UBIA) of qualified property. There are no REIT or PTP items, no domestic production deductions, and no SSTB limits.

Step 1. Compute Base QBI Amount

20% × $200,000 = $40,000

Step 2. Apply Wage and Property Tests

Step 3. Determine the Allowed QBI Deduction for This Business

Smaller of $40,000 (Step 1) or $25,000 (Step 2) = $25,000

Step 4. Apply the Overall Income Cap

20% × taxable income ($300,000) = $60,000
Compare $25,000 vs. $60,000 → the final deduction is $25,000.

📝 Note: Form 8995-A shows these steps across Part II and Part III, where wage and UBIA limits are applied.

Why aggregation can matter: 

If this taxpayer also owned another business with low QBI but higher wages or property, aggregation (when permitted under the IRS rules) might raise the combined deduction. The election requires that the businesses share common ownership and operate in related or integrated activities. 

See the aggregation section in Form 8995-A, Part I and Revenue Procedure 2019-11 for the wage computation guidance.

Scenario 3: Rental Real Estate Using the Safe Harbor

✏️ Hypothetical Example:

A taxpayer owns several small rental properties managed as one “rental enterprise.” More than 250 hours of rental services are performed during the year, including advertising, tenant screening, rent collection, and maintenance. Separate books are maintained, and detailed time logs are kept. None of the units are triple-net leases or personal residences.

Step 1. Confirm Safe Harbor Eligibility

If the taxpayer meets all safe-harbor requirements under Revenue Procedure 2019-38, the activity is treated as a trade or business for QBI purposes.

Step 2. Compute Base QBI Amount

QBI = $30,000
20% × $30,000 = $6,000

Step 3. Check the Overall Cap

Taxable income = $150,000 (no capital gains)
20% × $150,000 = $30,000
Take the lesser: $6,000 deduction.

Safe Harbor Documentation Requirements

To qualify, maintain:

✅ Separate books and records for each rental enterprise.
✅ 250 or more hours of rental services annually (or in three of the last five years for long-term ownership).
✅ Contemporaneous logs detailing hours, activities, and who performed them.
✅ A signed safe-harbor statement attached to the return.

Triple-net leases and property used as a residence are not eligible for the safe harbor.

Wrapping It Up

Calculating the Qualified Business Income deduction becomes more manageable when you organize your records and follow the IRS structure step by step. Keep documentation that links your business income to U.S. operations and supports any wages or property figures you use. If your deduction involves rental activities, make sure your logs, books, and statements meet the safe-harbor standards.

Thresholds, definitions, and line references change each year, so always review the most recent IRS forms and instructions before filing. For complex cases, such as multi-entity ownership, trusts, or specified service businesses, it may help to review your case with a qualified tax professional to confirm accuracy.

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