Tax
Definition
The QBI deduction (Section 199A) allows eligible self-employed individuals and pass-through business owners to deduct up to 20% of qualified business income from federal taxable income. It is one of the most significant tax benefits for small business owners, established by the 2017 Tax Cuts and Jobs Act.
The QBI deduction applies to income from sole proprietorships, partnerships, S-Corps, and LLCs taxed as pass-throughs — not C-Corps or W-2 wages. Below the income threshold ($182,050 single / $364,200 MFJ in 2024), eligible taxpayers deduct 20% of net qualified business income. Above the threshold, the deduction phases out entirely for Specified Service Trades or Businesses (SSTBs — including law, accounting, consulting, financial services, and healthcare) and becomes subject to W-2 wage and capital limitations for non-SSTB businesses. A consultant earning $150,000 in QBI might deduct $30,000, meaningfully reducing taxable income. The deduction cannot exceed 20% of taxable income over net capital gains. It is a below-the-line deduction and does not reduce self-employment tax — a common misconception.
The QBI deduction can save eligible business owners thousands annually — but the rules around phase-outs, SSTB classification, and W-2 wage calculations are complex. A tax advisor can model whether you qualify, whether entity structure changes could maximize the deduction, and how to document QBI accurately to withstand an IRS audit.