Qualified Business Income Deduction Can Save You up to 20 Percent

A powerful tax break for small business owners just got permanent. Here’s what to know.

Published: 12/2/2025, 10:30:53 AM EST

Qualified Business Income Deduction Can Save You up to 20 Percent — (iQoncept/Shutterstock)

Introduced by the 2017 Tax Cuts and Jobs Act (TCJA), the qualified business income (QBI) deduction benefited owners of pass-through businesses. These include sole proprietorships, partnerships, limited liability companies (LLCs), and S corporations.

The deduction is subject to several limitations, but, overall, it allows taxpayers to deduct up to 20 percent of their qualified business income. But what businesses are qualified to take this deduction?

Qualified Business Income Deduction Components

The QBI, also known as the 199A deduction, was set to sunset in December 2025, but the One Big Beautiful Bill Act (OBBB) made the deduction permanent.

According to the IRS, the deduction has two components: QBI and REIT/PTP.

The QBI component equals 20 percent of qualified business income from a domestic business operated as a sole proprietorship or through a partnership, S corporation, trust, or estate. It is subject to some limitations.

The real estate investment trust (REIT) and publicly traded partnership (PTP) component of the deduction equals 20 percent of qualified REIT dividends and qualified PTP income. It also has some limitations.

What Is Considered ‘Qualified Business Income’?

Qualified income is the net amount of qualified items of income, gain, deduction, and loss from any qualified trade or business. In other words, a business’s net profit.

It includes ordinary business income earned on the qualified trade or businesses mentioned previously.

According to the IRS, it also can include the deductible part of self-employment tax, self-employed health insurance deductions (simplified employee pension, or SEP; savings incentive match plan for employees, or SIMPLE; and other qualified plans), deductions for contributions to qualified retirement plans, and self-employed health insurance deductions.

What Is Not Considered ‘Qualified Business Income’

There is income that doesn’t qualify for the QBI deduction. This includes:

wages earned as an employee
income from a C corporation
reasonable compensation paid to S corporation shareholders
guaranteed payment to partners
certain annuities
foreign income not effectively connected with a U.S. trade or business

Investment income, such as capital gains or losses, and interest income, not properly allocable to a trade or business, is also not considered business income.

Dividends, except qualified REIT dividends for the REIT/PTP component, aren’t eligible for the QBI deduction.

Specified Service Trade or Businesses

Specified Service Trade or Businesses (SSTBs) include stricter income limitations. For example, an SSTB includes health, law, accounting, consulting, athletics, financial services, and performing arts.

Businesses that largely depend on the reputation or skill of their owners or employees also face stricter limitations.

Income Limits for the QBI Deduction

There is a threshold and phase-in width for taking the QBI deduction.

For 2025, the threshold to receive the full 20 percent QBI deduction is $197,300 for single taxpayers and $394,600 for joint filers. That means you can take the full deduction if you’re at or under those income amounts.

The phase-in range is $50,000 for taxpayers and $75,000 for those filing jointly. This is the transition phase before you are no longer eligible for the deduction.

QBI Deduction Carryforward

If the total QBI from all your qualified businesses is a negative amount for the year, you have a qualified business net loss. You can’t claim a QBI deduction in that year.

The negative amount is carried forward to the next tax year. It’s treated as a loss from a separate business for the purpose of calculating your net QBI in the subsequent year.

According to the Bradford Tax Institute, the loss can be carried forward indefinitely until it’s fully used to offset positive QBI in future years. It could result in lower QBI deductions in carry forward years.

QBI Aggregation Rules

Taxpayers who own multiple qualified businesses can choose to combine them for the QBI deduction. This allows wage and property limitations to be calculated and applied on an aggregate basis. That means the possibility of an overall increase in deduction.

But according to Larson Certified Public Accountants, businesses must meet specific criteria. For example, combined businesses should offer related services or products, have common ownership, and operate in the same trade or business.

OBBB and QBI Deduction

As above mentioned, the QBI, also known as the 199A deduction, was set to sunset in December 2025, but the OBBB made the deduction permanent.

Starting in 2026, a taxpayer with at least $1,000 of QBI from a qualified trade or business may claim a minimum QBI deduction of $400. The minimum is indexed to inflation annually.

The OBBB increased the phase-in limit range. Starting in 2026, it will rise from $50,000 to $75,000 for individual taxpayers and from $100,000 to $150,000 for those filing jointly.

How to Claim the QBI Deduction

You’ll need to complete Form 8995 or 8995A to claim the QBI deduction. You can take the QBI and still be able to deduct expenses directly related to your business, such as equipment or travel, as you normally would. Deduct business expenses on Schedule C.

The QBI is calculated based on net income after Schedule C deductions. Enter the amount of your QBI deduction on line 13 of the current Form 1040. This is part of the calculation that determines your taxable income.

The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. NTD does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. NTD holds no liability for the accuracy or timeliness of the information provided.

From The Epoch Times