What Is a Qualified Business Income Deduction?

The Qualified Business Income (QBI) deduction, also known as the Section 199A deduction, offers a tax benefit to owners of certain pass-through business entities. Introduced as part of the Tax Cuts and Jobs Act of 2017, this provision aimed to provide a tax reduction comparable to corporate tax changes enacted in the same legislation. It allows eligible self-employed individuals and small business owners to deduct a portion of their business income. The deduction is applied to a taxpayer’s taxable income, meaning it reduces the amount of income subject to tax rather than impacting adjusted gross income.

What is the Qualified Business Income Deduction?

The QBI deduction applies to individuals, estates, and trusts, but not directly to the business entity itself. QBI is defined as the net amount of qualified items of income, gain, deduction, and loss from any qualified trade or business conducted within the United States.

Income types included in QBI generally encompass earnings from sole proprietorships, partnerships, S corporations, and limited liability companies (LLCs) that are taxed as pass-through entities. Certain types of income are specifically excluded from QBI. These exclusions include investment income such as capital gains or losses, dividends, and interest income. Guaranteed payments made to partners or S corporation shareholders, as well as reasonable compensation paid to S corporation shareholders for services rendered, do not count as QBI. Wages earned as an employee are also explicitly excluded from this definition.

Who Qualifies for the Deduction?

A “qualified trade or business” broadly includes most businesses, with specific exclusions for services performed as an employee. It also excludes certain “specified service trades or businesses” (SSTBs) for taxpayers whose income exceeds certain thresholds.

The deduction’s availability and calculation are subject to limitations based on the taxpayer’s taxable income before the QBI deduction. For the 2025 tax year, these limitations are structured around three primary income tiers. Taxpayers with taxable income below a lower threshold—for example, $197,300 for single filers or $394,600 for married filing jointly—are generally eligible for the full 20% deduction of their QBI or 20% of their taxable income, whichever is less, without further limitations.

When a taxpayer’s taxable income falls between the lower and upper thresholds, the deduction begins to be phased in with additional limitations, and restrictions for SSTBs start to apply. For 2025, the phase-in range extends up to $247,300 for single filers and $494,600 for married filing jointly. Taxpayers with taxable income exceeding the upper threshold face full application of these limitations, and income from SSTBs generally becomes ineligible for any deduction.

Understanding Specified Service Trades or Businesses

Specified Service Trades or Businesses (SSTBs) are a specific category of businesses. An SSTB is generally defined as any trade or business where the principal asset is the reputation or skill of one or more of its employees or owners. This broad definition captures many professional service fields.

Examples of SSTBs include services provided in fields such as health, law, accounting, actuarial science, performing arts, and consulting. Financial services, brokerage services, and athletics are also designated as SSTBs. This includes professionals like doctors, lawyers, accountants, and professional athletes.

Calculating the Deduction Amount

The deduction is initially determined as the lesser of two amounts: 20% of the taxpayer’s Qualified Business Income (QBI) or 20% of the taxpayer’s taxable income before the QBI deduction, reduced by any net capital gain.

If a taxpayer’s taxable income exceeds the lower threshold, additional limitations come into play. These limitations are designed to restrict the deduction based on the business’s W-2 wages and the unadjusted basis immediately after acquisition (UBIA) of its qualified property. The first of these is the “wage limit,” which caps the deduction at 50% of the W-2 wages paid by the qualified trade or business.

An alternative limitation, often referred to as the “wage and UBIA limit,” is the greater of 50% of the W-2 wages paid by the business or 25% of the W-2 wages plus 2.5% of the unadjusted basis immediately after acquisition of qualified property. Qualified property generally refers to tangible, depreciable property held by the business at year-end.

For taxpayers involved in multiple qualified businesses, the QBI and limitations are generally calculated separately for each business. The individual QBI amounts, W-2 wages, and UBIA of qualified property from each business are then combined to determine the overall deduction, subject to the overall taxable income limitation.

How to Claim the Deduction

The final QBI deduction amount is reported directly on an individual’s Form 1040, typically on Line 13. This placement signifies that it is a deduction from taxable income, applied after adjusted gross income (AGI) has been determined.

To calculate the deduction, taxpayers must complete either Form 8995, Qualified Business Income Deduction Simplified Computation, or Form 8995-A, Qualified Business Income Deduction. Form 8995 is generally used by taxpayers whose taxable income, before the QBI deduction, is at or below the applicable lower income threshold. This simplified form is suitable for those not subject to the complex wage and UBIA limitations or the SSTB restrictions.

Taxpayers whose taxable income exceeds the lower threshold, or those with income from specified service trades or businesses (SSTBs), must use the more detailed Form 8995-A. This form allows for the necessary calculations to apply the wage and UBIA limitations and the SSTB phase-out or exclusion rules. Regardless of the form used, maintaining detailed records of business income, expenses, W-2 wages paid, and qualified property is important to support the claimed deduction.