The Ultimate Guide to Qualified Business Income (QBI)

Here’s something worth exploring if you run a business. The Qualified Business Income (QBI) deduction under Internal Revenue Code Section 199A can allow certain business owners to reduce taxable income by up to 20% of qualified earnings. It may also apply to specific REIT dividends and income from publicly traded partnerships.

Sole proprietors, partners, S corporation shareholders, and some trusts or estates may qualify, provided their taxable income stays within the IRS’s 2025 limits.

Whether you work independently or operate a growing LLC, it’s worth understanding how the QBI rules apply to your situation. The sections below explain who qualifies, how the deduction is calculated, and what steps could help you make the most of it when filing your return.

2025 Eligibility and Income Thresholds

Most pass-through businesses can qualify for the Qualified Business Income (QBI) deduction under Internal Revenue Code Section 199A. This includes:

✅ Sole proprietorships that report income on Schedule C
✅ Partnerships and S corporations
✅ Certain trusts and estates
✅ Rental real estate enterprises that meet the IRS safe-harbor test

C corporations and income you earn as an employee (reported on Form W-2) are not eligible for the QBI deduction.

For the 2025 tax year, the IRS inflation-adjusted thresholds are:

Once taxable income exceeds these levels, the deduction starts to phase out within a range of $50,000 (single/HOH/MFS) or $100,000 (MFJ). During this phase-in range, the 20% deduction may be limited by the greater of:

When taxable income reaches $247,300 (single) or $494,600 (joint), the phase-in ends and the limitation fully applies.

📝 Note: The IRS adjusts these thresholds annually for inflation, so always check the latest figures each tax year before filing.

Specified Service Trades or Businesses (SSTBs)

A Specified Service Trade or Business (SSTB)  involves income derived primarily from the reputation or skill of owners or employees. These generally include:

For SSTB owners, the deduction becomes more restricted as income rises:

✅ Full 20% deduction: Allowed when taxable income is at or below $197,300 (single) or $394,600 (joint).

✅ Partial deduction: Available within the $50,000 / $100,000 phase-out range, and gradually reduced as income increases.

✅ No deduction: Once taxable income exceeds $247,300 (single) or $494,600 (joint).

📝 Note: Many SSTB owners use income-planning strategies—such as deferring income, accelerating deductible expenses, or increasing qualified W-2 wages—to stay within the favorable range and preserve part or all of the deduction.

How to Calculate Your QBI Deduction

The Qualified Business Income (QBI) deduction is calculated using Form 8995 or Form 8995-A (for more complex cases). The deduction equals the lesser of:

✅ 20% of total QBI (plus 20% of qualified REIT dividends and income from publicly traded partnerships), or
✅ 20% of taxable income, reduced by any net capital gains

If taxable income goes beyond the 2025 thresholds — $197,300 for single filers or $394,600 for joint filers — the deduction may be limited by the W-2 wage and property test. Under this rule, you take the greater of:

📝 Note: The wage/UBIA test prevents high-income owners with little to no payroll or depreciable property from claiming the full 20% deduction.

Business owners with more than one activity can choose to aggregate related businesses. This allows them to combine QBI, W-2 wages, and UBIA to potentially increase their deduction. Once you choose to aggregate, it must remain consistent each year and be disclosed on Form 8995-A.

If one business reports a QBI loss, that loss offsets positive QBI from other businesses. Any unused loss carries forward to the next year. Negative amounts from REIT dividends or PTP income are handled separately.

Hypothetical Example (Step-by-Step)

Let’s look at a simplified example for a married couple filing jointly with $500,000 of taxable income.

Facts:

Step 1: Aggregate QBI
$150,000 + $30,000 = $180,000

Step 2: Tentative deduction
20% × $180,000 = $36,000

Step 3: Apply wage/UBIA limitation

Step 4: Taxable-income cap
20% × ($500,000 – $10,000) = 20% × $490,000 = $98,000

Step 5: Final deduction
The QBI deduction is the lesser of Steps 2, 3, and 4 → $20,000

Step 6: Report
Enter $20,000 on Form 8995-A, Schedule B, and carry it to Form 1040, line 13.

📝 Note: This example shows how W-2 wages and UBIA can restrict the 20% benefit. High-income owners often explore ways to adjust payroll or invest in qualified property to help maintain a larger deduction.

Keep accurate records to track QBI, W-2 wages, and property basis. It’s also practical to revisit your business’s pay structure before year-end and test different scenarios using Form 8995 worksheets. For complex cases, like multiple SSTBs or prior-year losses, review the Form 8995-A instructions or seek guidance from a qualified tax professional.

2025 Updates and Tax-Saving Strategies

The Qualified Business Income (QBI) deduction under Internal Revenue Code Section 199A remains available in 2025, and it’s slightly more flexible thanks to inflation adjustments. The IRS increased the taxable income thresholds again through its annual update, as outlined in Internal Revenue Bulletin 2024-45.

These higher limits give many pass-through owners a wider range before wage or property-based limits begin to apply. It’s a small but valuable adjustment that could make the 20% deduction more accessible for 2025 returns.

📝 Note: Even small year-to-year threshold increases can make a noticeable difference for business owners operating near the phase-out range.

New $400 Minimum Deduction Rule

Congress introduced a new safety net for smaller businesses and active owners. Starting in tax year 2026, any owner who materially participates in their business and earns at least $1,000 of qualified business income will be eligible for a minimum $400 QBI deduction.

This amount will be indexed for inflation in $5 increments. Although this rule does not apply to 2025 returns, it’s worth preparing early.

✅ Confirm that your activity meets the material participation requirements under IRC Section 469(h).
✅ Keep accurate, contemporaneous records of your business involvement and income.
✅ Review your bookkeeping systems now to ensure you can easily claim the automatic deduction when it becomes available.

📝 Note: This upcoming rule could benefit freelancers, part-time business owners, and small partnerships that might otherwise fall below the standard deduction thresholds.

Practical Planning Tips

Here are some strategies that could help you make the most of the 2025 QBI deduction:

✅ Run year-end projections. Use draft Form 8995 or 8995-A worksheets to estimate where your taxable income falls relative to the new thresholds. Adjust income or deductions if needed.

✅ Pay yourself reasonable W-2 wages. If you operate through an S corporation or partnership, paying yourself W-2 wages can strengthen the wage component used in the QBI formula—helping preserve the deduction once income exceeds the limit.

✅ Invest in depreciable property. Purchasing qualifying business equipment before year-end raises your UBIA, which may increase the allowable deduction for high-income years.

✅ Time income and expenses. Deferring late-year invoices or accelerating deductible costs can help keep taxable income within the favorable phase-out window.

✅ Review entity structure. Compare results between operating as a sole proprietor and electing S corporation status. In some cases, paying yourself wages under an S corporation can improve your overall after-tax results.

✅ Max out retirement contributions. Solo 401k or SEP IRA contributions directly reduce taxable income. This can help service professionals near the upper threshold preserve the full 20% deduction.

Pairing these strategies with accurate record-keeping can help you benefit from the expanded 2025 thresholds and prepare for the upcoming $400 minimum deduction. Reviewing your numbers before year-end is one of the simplest ways to stay ahead of the QBI limits and maintain flexibility when filing your return.

Final Thoughts

The QBI deduction continues to be a useful tax benefit for eligible business owners in 2025. Its impact depends on factors like income levels, wages, and property basis, so keeping records accurate and reviewing updates each year is important.

It could help to run projections or review Form 8995 before filing to confirm calculations. For complex cases, consulting a qualified tax professional may provide added clarity and help ensure compliance with the latest IRS rules.

📌 Also read: How Solo 401k Contributions Affect the QBI Deduction

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