How Much Is the Qualified Business Income Deduction?

The Qualified Business Income (QBI) deduction, also known as the Section 199A deduction, offers a significant tax benefit to eligible business owners. It was established by the Tax Cuts and Jobs Act (TCJA) of 2017 to provide a deduction of up to 20% of qualified business income. This deduction aims to align the tax burden on owners of pass-through entities more closely with the reduced corporate tax rate enacted by the TCJA. The QBI deduction directly reduces taxable income. The deduction applies to tax years beginning after December 31, 2017, and is scheduled to expire after December 31, 2025, unless Congress extends it.

Understanding Qualified Business Income

Qualified Business Income (QBI) represents the net amount of qualified items of income, gain, deduction, and loss from a qualified trade or business conducted within the United States. This income typically includes the ordinary business income generated by a sole proprietorship, partnership, or S corporation. Rental real estate activities can also generate QBI if they meet the definition of a trade or business. The IRS provides a safe harbor for rental real estate to be treated as a trade or business for QBI deduction purposes, such as maintaining separate books and records.

Certain types of income are specifically excluded from QBI. Investment income, including capital gains or losses, dividends, and interest income not properly allocable to a trade or business, does not qualify. For S corporation shareholder-employees, reasonable compensation paid for services rendered is not considered QBI. Similarly, guaranteed payments received by a partner in a partnership for services provided are excluded from QBI. Wage income earned as an employee is also explicitly excluded from QBI.

Eligibility for the QBI Deduction

The QBI deduction is available to individuals, trusts, and estates that own interests in qualified pass-through entities. These entities include sole proprietorships, partnerships, S corporations, and limited liability companies (LLCs) taxed as sole proprietorships or partnerships. These structures typically pass income directly to their owners’ personal tax returns.

C corporations are not eligible to claim the QBI deduction. The deduction was specifically designed to provide a comparable tax benefit to pass-through businesses, given the permanent reduction in the corporate tax rate for C corporations under the TCJA.

Determining Your QBI Deduction Amount

The general rule for the QBI deduction allows taxpayers to deduct up to 20% of their qualified business income (QBI). This deduction, however, is subject to a significant overall limitation: it cannot exceed 20% of the taxpayer’s taxable income before the QBI deduction, reduced by any net capital gains.

For taxpayers whose taxable income falls below specific thresholds, the calculation is generally straightforward. For the 2023 tax year, these thresholds were $182,100 for single filers and $364,200 for married filing jointly. For 2024, the thresholds increased to $191,950 for single filers and $383,900 for married filing jointly. Below these amounts, taxpayers typically receive the full 20% deduction on their QBI, regardless of whether their business is a specified service trade or business (SSTB).

When a taxpayer’s taxable income exceeds these thresholds, more complex limitations apply, based on W-2 wages paid by the business and the unadjusted basis immediately after acquisition (UBIA) of qualified property. For non-Specified Service Trades or Businesses (non-SSTBs) with income above the threshold, the QBI deduction is limited to the lesser of 20% of QBI or the greater of two amounts: (1) 50% of the W-2 wages paid by the qualified business, or (2) 25% of the W-2 wages paid by the qualified business plus 2.5% of the unadjusted basis immediately after acquisition (UBIA) of qualified property. The UBIA generally refers to the original cost of depreciable tangible property used in the business. This limitation benefits businesses with substantial capital investments or significant payrolls.

These W-2 wage and UBIA limitations are phased in for taxpayers whose income falls within a specific range above the initial threshold. For 2023, the phase-in range was between $182,101 and $232,100 for single filers and between $364,201 and $464,200 for married filing jointly. In 2024, this range is $191,951 to $241,950 for single filers and $383,901 to $483,900 for married filing jointly. Within this phase-in range, the deduction gradually becomes subject to the W-2 wage and UBIA limitations. Once taxable income exceeds the upper end of this phase-in range, the W-2 wage and UBIA limitations apply in full.

A Specified Service Trade or Business (SSTB) is defined as any trade or business primarily involving the performance of services in fields where the principal asset is the reputation or skill of one or more of its employees or owners. This includes professions such as health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, and brokerage services.

The QBI deduction for SSTBs is treated differently based on taxable income. If a taxpayer’s taxable income is below the lower threshold (e.g., $191,950 for single filers in 2024, $383,900 for married filing jointly in 2024), the full 20% QBI deduction is generally allowed, just like for non-SSTBs. However, if the taxpayer’s income falls within the phase-in range (e.g., $191,951 to $241,950 for single filers in 2024, $383,901 to $483,900 for married filing jointly in 2024), the QBI deduction for an SSTB is gradually phased out. Once the taxpayer’s taxable income exceeds the upper end of this phase-in range, the QBI deduction for income from an SSTB is completely disallowed. This structured limitation aims to prevent high-income service professionals from receiving the full benefit of the deduction.

Reporting the QBI Deduction

The Qualified Business Income deduction is considered an “above-the-line” deduction. This means it reduces your adjusted gross income (AGI) and ultimately your taxable income, regardless of whether you itemize deductions or take the standard deduction.

On Form 1040, the QBI deduction is reported on Line 13. Taxpayers use Form 8995, Qualified Business Income Deduction Simplified Computation, or Form 8995-A, Qualified Business Income Deduction, to calculate their deduction. Form 8995 is used for simpler computations, typically when taxable income is below the income thresholds. If taxable income exceeds these thresholds or other complexities exist, Form 8995-A is required.

The QBI deduction is calculated separately for each qualified business. If a taxpayer has multiple qualified businesses, the QBI from each is determined individually, and then aggregated for the overall deduction calculation. For owners of partnerships and S corporations, necessary information, such as QBI, W-2 wages, and UBIA of qualified property, is reported to them on Schedule K-1. This information from Schedule K-1 is then used by the individual taxpayer to compute their QBI deduction on their personal tax return.