S Corp QBI Deduction: How to Calculate and Claim It

The Qualified Business Income (QBI) deduction, from the Tax Cuts and Jobs Act of 2017, offers a tax benefit for owners of pass-through businesses like S corporations. Also known as the Section 199A deduction, it allows eligible shareholders to deduct up to 20% of their qualified business income. This is a personal deduction taken on the shareholder’s tax return, not at the corporate level. The rules involve specific income definitions, calculations, and limitations based on income and business type.

Determining Your Qualified Business Income

Qualified Business Income is the net amount of qualified items of income, gain, deduction, and loss from a U.S.-based trade or business. For an S corporation shareholder, this is their share of the company’s ordinary business income, which the corporation reports to them. Understanding what this figure includes is the first step.

A distinction exists between income that qualifies for the deduction and other payments a shareholder receives. The shareholder’s distributive share of the S corporation’s net income is considered QBI. However, any “reasonable compensation” paid to a shareholder-employee is not QBI, as this is treated as W-2 wages subject to payroll taxes.

For example, if an S corporation has $200,000 in net business income and pays its sole shareholder-employee a reasonable salary of $80,000, the corporation’s remaining ordinary income is $120,000. The shareholder’s QBI is their share of that $120,000. The $80,000 salary is W-2 income and does not qualify.

Certain other types of income that pass through an S corporation are also excluded from QBI. These include investment-related items such as capital gains and losses, dividends, and interest income. Guaranteed payments made to a shareholder for services are also not considered QBI.

Calculating the Basic QBI Deduction

The basic calculation for the QBI deduction is 20% of your QBI. For a shareholder with an allocable QBI of $100,000, the initial deduction would be $20,000. This is the starting point before applying any limitations.

This initial amount is subject to an overarching limitation. The QBI deduction cannot exceed 20% of the shareholder’s taxable income (before the QBI deduction) minus any net capital gain. The final deduction is the lesser of this amount or the 20% of QBI.

Consider a single shareholder with $100,000 in QBI. Their total taxable income before the QBI deduction is $120,000, which includes $10,000 in net capital gains. The first calculation is 20% of QBI ($20,000). The second is 20% of taxable income minus net capital gain (($120,000 – $10,000) x 0.20 = $22,000). The shareholder’s deduction is $20,000, the lesser of the two.

This basic calculation applies to taxpayers whose taxable income falls below IRS thresholds. Once a shareholder’s taxable income surpasses these levels, additional limitations involving W-2 wages and business property are triggered, which can alter the final deduction.

Navigating Deduction Limitations

When a shareholder’s taxable income exceeds federally defined thresholds, the QBI deduction calculation changes. For 2025, the thresholds are $191,950 for single filers and $383,900 for married filing jointly. For income above these amounts, the deduction may be limited by the S corporation’s W-2 wages or property value. Within a phase-in range above these thresholds ($50,000 for single, $100,000 for joint), the limitations are gradually applied.

The W-2 Wage and UBIA Limitation

For shareholders with income above the thresholds, the QBI deduction is limited to the lesser of 20% of their QBI or a figure based on the business’s payroll and assets. This limitation is the greater of two amounts: 50% of the shareholder’s allocable share of the S corporation’s W-2 wages, or 25% of those wages plus 2.5% of the unadjusted basis immediately after acquisition (UBIA) of all qualified property. UBIA is the original purchase price of tangible, depreciable property used in the business.

Imagine a shareholder with $300,000 in QBI and taxable income above the limit. Their allocable share of the S corp’s W-2 wages is $80,000, and their share of the UBIA of qualified property is $500,000. The first part of the limitation is 50% of wages ($40,000). The second part is 25% of wages plus 2.5% of UBIA ($32,500). The greater of these two is $40,000, so the shareholder’s deduction is limited to $40,000, which is less than the initial $60,000 (20% of QBI).

Specified Service Trade or Business (SSTB) Rules

The rules are more restrictive for shareholders in a Specified Service Trade or Business (SSTB), which includes fields like health, law, and consulting. For SSTB owners with taxable income above the threshold and phase-in range, the QBI deduction is disallowed. For 2025, this means an SSTB owner with taxable income over $241,950 (single) or $483,900 (married filing jointly) receives no QBI deduction.

If an SSTB owner’s income falls within the phase-in range, the deduction is reduced rather than eliminated. The taxpayer receives only a partial amount of their QBI, wages, and property to use in the calculation. For example, a single filer $25,000 into the $50,000 phase-in range has lost 50% of the benefit ($25,000 / $50,000). They would only consider 50% of their QBI and 50% of the W-2 wages/UBIA when calculating their limited deduction.

Reporting and Claiming the Deduction

Claiming the QBI deduction involves both the S corporation and its shareholders. The corporation does not take the deduction itself but must provide each shareholder with the data needed to calculate it on their personal tax return. This information is delivered on Schedule K-1 (Form 1120-S).

Information Gathering (The S Corp’s Role)

The S corporation must calculate and report each shareholder’s portion of the items related to the QBI deduction. This information is found in Box 17 of the Schedule K-1 and is identified by a series of codes. Code V represents the shareholder’s share of Section 199A income (the QBI itself), Code W details the allocable W-2 wages, and Code X provides the share of the unadjusted basis of qualified property. These three codes are the most common for the calculation.

Procedural Action (The Shareholder’s Role)

Using the Schedule K-1, the shareholder completes the necessary IRS forms, and the form used depends on the shareholder’s taxable income. If taxable income before the QBI deduction is at or below the annual thresholds, the shareholder uses Form 8995, Qualified Business Income Deduction Simplified Computation.

If a shareholder’s taxable income exceeds the thresholds, they must file the more detailed Form 8995-A, Qualified Business Income Deduction. This form is required to calculate the W-2 wage and UBIA limitations and to navigate the phase-in rules for high-income individuals or those in an SSTB. The shareholder transfers the amounts from their K-1, Box 17, to the appropriate lines on Form 8995-A to determine the final deduction amount, which is then entered on their Form 1040.