Qualified business income deduction

What is the QBI deduction? 

The QBI deduction, also known as Section 199A of the Internal Revenue Code, was established by the 2017 Tax Cuts and Jobs Act (TCJA). It enables eligible self-employed individuals and small business owners — including many who own pass-through entities like partnerships, S corporations, and sole proprietorships — to deduct up to 20% of their QBI. Additionally, they can deduct up to 20% of qualified REIT dividends and publicly traded partnership (PTP) income; certain trusts and estates may also qualify for this deduction.

The taxpayer can take the deduction whether they itemize their deductions or choose the standard deduction. Rather than taking the deduction at the entity level, the owner of an eligible pass-through entity takes it at the owner, partner, or shareholder level.

The QBI deduction comprises two main components: — the qualified business income and the real estate investment trust (REIT) or publicly traded partnership (PTP) components:

• QBI component. This component allows qualifying taxpayers to deduct 20% of their qualified business income from a domestic business, whether it's operated as a sole proprietorship, S corporation, partnership, estate, or trust. The IRS defines qualified business income deduction as the “net amount of qualified items of income, gain, deduction and loss from a qualified business or trade.”

Please be aware that there are multiple restrictions on the QBI component. These restrictions depend on the nature of the trade or business, the total W-2 wages paid, and the unadjusted basis immediately after acquisition (UBIA) of the qualified property it owns. If the taxpayer is a horticultural or agricultural cooperative patron, this may reduce their QBI deduction.

• REIT/PTP component. This component equates to 20% of the combined qualified real estate investment trust (REIT) dividends, including REIT dividends earned through a regulated investment company (RIC) and qualified publicly traded partnership (PTP) income. Dividends from REITs and income from PTPs typically qualify for the 20% deduction.

Be aware that the REIT/PTP component does not have limitations based on W-2 wages or the unadjusted basis immediately after acquiring qualified property. Furthermore, the amount of PTP income that qualifies may be limited depending on the taxpayer’s income and the type of business engaged in by the PTP.

Who qualifies for the QBI deduction?

Those who may qualify for the deduction include many owners of partnerships, S corporations, sole proprietorships, single-member limited liability companies (LLCs), and some trusts and estates. However, there are several limitations to consider:

• Specified service trade or business. If an entity is a specified service trade or business (SSTB), its deduction may be limited — or even eliminated — should the taxpayer’s taxable income reach a certain limit. The IRS defines an SSTB as “A trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, investing and investment management, trading or dealing in certain assets, or any trade or business where the principal asset is the reputation or skill of one or more of its employees or owners.”

If the business is an SSTB, the total taxable income — the amount of income subject to tax, after deductions and exemptions — must be considered to determine whether it gets the full 20% deduction, a limited deduction, or no deduction at all.

For instance, based on the taxable income limits set for 2024, the SSTB deduction limitations are phased out when the owner’s taxable income exceeds the income threshold amount of $383,900 for married filing jointly and $191,950 for other filers. No deduction is permitted when taxable income exceeds the upper-income threshold amount of $483,900 for married filing jointly and $241,950 for other filers in 2024.

• Non-SSTBs. For any business that is not an SSTB and where the owner's taxable income surpasses the established thresholds, the QBI deduction for each trade or business could be partially or fully reduced to the higher of either of the following:
  • Half (50%) of the W-2 wages paid by the trade or business
  • One-quarter (25%) of the W-2 wages combined with 2.5% of the unadjusted basis immediately after acquisition (UBIA) of qualified property

Qualified property refers to any tangible property associated with a specific trade or business. 

• Patrons of horticultural or agricultural cooperatives. In some instances, patrons of horticultural or agricultural cooperatives are required to reduce their deduction under section 199A(b)(7) (patron reduction). As the IRS states, patrons of an agricultural or horticultural cooperative must reduce the cooperative QBI by the lesser of either of the following:
  • 9% of the qualified business income allocable to qualified payments
  • 50% of W-2 wages from the trade or business allocable to the qualified payments

What are the exceptions to QBI?

Not all income falls under qualified business income, so awareness of the exceptions is essential. The deduction can only be claimed on income directly earned from a business versus one’s taxable income. Taxable income is taken into consideration when determining if a taxpayer can claim the full 20% deduction.

As outlined by the IRS, it does not include items such as:

• Wage income
• Interest income not properly allocable to a trade or business
• Investment items like capital gains or losses
• Items that are not correctly includable in taxable income
• Income that is not effectively connected with the conduct of business within the United States
• Income, loss, or deductions from notional principal contracts
• Annuities, unless received in connection with the trade or business
• Payments received by a partner for services other than in a capacity as a partner
• Qualified real estate investment trust dividends
• Amounts received as guaranteed payments from a partnership
• Commodities transactions or foreign currency gains or losses
• Certain dividends and payments in lieu of dividends
• Publicly traded partnership income
• Amounts received as reasonable compensation from a S corporation

What income is not eligible for QBI deduction?

According to the IRS, income not eligible for the qualified business income deduction includes income earned through a C corporation or by providing services as an employee not eligible for the deduction.

How do you calculate the QBI deduction?

When calculating the QBI deduction, you must take several factors into account. These will determine which deduction the taxpayer is eligible for — the full 20%, reduced, or none at all. To make this determination, take the following steps:

1. Determine if the business is a specified service trade or business. If it is an SSTB, the total taxable income — the amount of income subject to tax, after deductions and exemptions — must be considered to determine whether it can claim the full 20% deduction, a limited deduction, or no deduction at all.
2. Assess the total taxable income for the year. If the taxpayer’s taxable income is below the taxable income threshold amount, no matter the type of business, they are likely eligible for the full 20% qualified business income deduction.
3. Calculate a limited deduction if the business is an SSTB and its taxable income falls within the phase-in range. For 2024, this range is between $383,900 and $483,900 for joint filers and between $191,951 and $241,950 for other filers. In 2025, these amounts increase to $197,300 for single taxpayers and $394,600 for joint filers.

Evaluate this calculation by applying the following:

• Half (50%) of W-2 wages paid by the qualified trade or business, or
• One-quarter (25%) of W-2 wages, plus 2.5% of the unadjusted basis immediately upon acquisition (UBIA) of qualified property

After comparing the calculations to 20% of the QBI, deduct the smaller amount.

Calculations can quickly become complex. For assistance, refer to the IRS’s instructions for Form 8995.

What is a QBI deduction carryforward?

A QBI deduction carryforward is when a business has a negative QBI or qualified business losses, which adversely impacts the 20% deduction. The losses carry forward indefinitely until fully offset by positive qualified business income.

As the IRS states: “Any negative QBI carried into the subsequent tax year as a qualified business net loss carryforward will be used in that subsequent year to determine the net qualified business income or loss in that year. If the net loss carryforward from the originating year is not fully absorbed in the subsequent year, the new net loss amount will become a qualified business net loss carryforward to be applied in the subsequent year.”

How do you report QBI deduction?

To report QBI deductions, use Form 8995, Qualified Business Income Deduction Simplified Computation and Form 8995-A, Qualified Business Income Deduction.

If the taxpayer’s taxable income exceeds the threshold or the trade or business is a patron of a specified cooperative, the IRS requires Form 8995-A. In all other cases, taxpayers may use Form 8995.

Form 8995 or 8995-A, as applicable, must be attached to any tax return claiming a qualified business income deduction.

Is the qualified business income deduction going away?

Unless extended by Congress, the QBI deduction will expire on December 31, 2025. Pass-through business income would then be taxed based on individual federal income tax rates without a deduction for QBI.

While the fate of the QBI deduction remains unclear, at this time, it will likely be extended — in some form or another — as it proved to be a highly popular provision of the 2017 Tax Cuts and Jobs Act.

This information was last updated on 01/21/2025.