Does Consulting Qualify for the QBI Deduction?

Overview of the Qualified Business Income Deduction

The Qualified Business Income (QBI) deduction, also known as the Section 199A deduction, originated from the 2017 Tax Cuts and Jobs Act (TCJA). This provision offers a significant tax benefit to eligible self-employed individuals and owners of certain small businesses, allowing them to deduct up to 20% of their qualified business income, plus 20% of qualified real estate investment trust (REIT) dividends and publicly traded partnership (PTP) income.

This deduction is available to owners of pass-through entities, including sole proprietorships, partnerships, S corporations, and certain trusts and estates. Income from these entities “passes through” to the owners’ individual tax returns, where it is subject to personal income tax rates. The QBI deduction aims to provide tax relief for these businesses, similar to the corporate tax rate reduction under the TCJA.

Qualified Business Income (QBI) refers to the net amount of qualified items of income, gain, deduction, and loss from a qualified trade or business. This generally includes the net profit earned by the business, along with certain deductible expenses such as self-employment tax, self-employed health insurance premiums, and contributions to qualified retirement plans. QBI specifically excludes items like capital gains or losses, investment income, and wages earned as an employee.

The QBI deduction can be claimed regardless of whether a taxpayer itemizes deductions on Schedule A or takes the standard deduction. The deduction is limited to the lesser of the QBI component plus the REIT/PTP component, or 20% of the taxpayer’s taxable income minus net capital gain. The QBI deduction is currently set to expire on December 31, 2025, unless Congress extends it.

Defining a Specified Service Trade or Business

Understanding what constitutes a “Specified Service Trade or Business” (SSTB) is important for the QBI deduction. An SSTB is defined by the IRS as any trade or business involving the performance of services in specific fields. These fields include health, law, accounting, actuarial science, performing arts, athletics, financial services, brokerage services, investing and investment management, trading, and dealing in certain assets.

An SSTB also encompasses any trade or business where the principal asset is the reputation or skill of one or more of its employees or owners. This includes income received for endorsing products, using an individual’s image or likeness, or making appearances.

Consulting is specifically identified by the IRS as a service field that generally falls under the SSTB definition. IRS regulations define consulting as providing professional advice and counsel to clients to assist them in achieving goals and solving problems. This includes, for instance, advising on personnel structures or providing counsel related to lobbying efforts.

However, if consulting services are provided in conjunction with the sale of goods or services by a business not otherwise an SSTB, and these consulting services are not separately billed, they might not be considered an SSTB. The specific nature of the service provided, and how it is structured and compensated, is crucial in determining its SSTB status. Each situation requires a case-by-case determination based on all facts and circumstances.

Taxable Income Limitations

The amount of QBI deduction a taxpayer can claim, especially for an SSTB like consulting, is impacted by their total taxable income. The IRS establishes specific income thresholds that determine the deduction’s extent. For the 2025 tax year, these thresholds are approximately $197,300 for single filers and $394,600 for those married filing jointly.

If a taxpayer’s taxable income falls below these lower thresholds, they are generally eligible for the full 20% QBI deduction, regardless of whether their business is an SSTB. For example, a consultant with taxable income well below the threshold can claim the full 20% of their qualified business income.

A phase-out range applies when a taxpayer’s taxable income falls within certain limits. For 2025, this range is approximately between $197,301 and $247,300 for single filers, and between $394,601 and $494,600 for married filing jointly. Within this range, the QBI deduction for an SSTB is gradually limited. The deduction becomes subject to additional limitations based on the amount of W-2 wages paid by the business and the unadjusted basis immediately after acquisition (UBIA) of qualified property held by the business.

The W-2 wage limitation refers to 50% of the W-2 wages paid by the qualified trade or business. UBIA of qualified property refers to the unadjusted basis of tangible depreciable property used in the business. For taxpayers with income in the phase-out range, the QBI deduction is capped at the greater of 50% of the W-2 wages paid by the business, or 25% of W-2 wages plus 2.5% of the UBIA of qualified property.

If a taxpayer’s taxable income exceeds the upper threshold of the phase-out range (approximately $247,300 for single filers and $494,600 for married filing jointly in 2025), businesses classified as SSTBs are no longer eligible for any QBI deduction. High-income consultants whose earnings surpass this upper limit will not receive the QBI deduction. For non-SSTBs, the QBI deduction is generally still available at higher income levels, though it remains subject to the W-2 wage and UBIA limitations.