If you’re self-employed or own a small business, you may be eligible for the qualified business income, or QBI, deduction — which is a valuable tool for trimming your tax bill.
What is the qualified business income deduction?
The QBI deduction, also known as Section 199A, can shave up to 20 percent off of a taxpayer’s qualified business income.
“Where we tend to see the biggest benefit is with relatively small to medium businesses that are either sole proprietorships, partnerships or S corporations,” says Jeremy Wells, an enrolled agent and chief operating officer of Chesapeake, Va.-based Steadfast Bookkeeping.
That includes people who do freelance, gig or contract work. Generally, this tax benefit is for business owners whose business income passes through to their personal income tax return. Some estates and trusts may also qualify for this deduction.
While tax preparation software often will identify this deduction automatically for those who qualify, the rules can be complicated. If you think you may be eligible for the QBI, it makes sense to know the basics before you file.
Who can claim the qualified business income deduction?
The QBI deduction, also known as Section 199A, came about as a part of the Tax Cuts and Jobs Act, or TCJA, of 2017.
It allows for an up to 20 percent deduction in qualified business income for someone who is self-employed, including partnerships, limited liability corporations (LLCs) and S corporations, says Lisa Greene-Lewis, a CPA and tax expert with TurboTax. The deduction is not available to C corporations. The Congressional Research Service did a detailed dive, including examples, into how the Section 199A deduction works.
The QBI deduction originated as a way to give tax relief to so-called pass-through business owners — for whom business income flows to their personal tax return — comparable to the reductions in corporate tax rates (as a result of the TCJA) that benefited larger businesses, Wells says.
In general, to qualify for the full amount of the QBI deduction, your income for tax year 2024, before the deduction, must be less than $383,900 for married filing jointly taxpayers, or $191,950 for all other filers, according to the IRS.
For the 2025 tax year, those income limits rise to $394,600 for married filing jointly filers and $197,300 for all other taxpayers. Higher earners may be eligible for a portion of the QBI deduction as well, but there’s another set of rules governing those calculations.
Notably, you can claim the QBI deduction whether you itemize your deductions or claim the standard deduction.
The QBI deduction is set to expire in 2025, and at this point it’s uncertain whether it will be renewed.
How does the qualified business deduction work?
To claim the qualified business income deduction, you’ll need to complete Form 8995 or 8995A, depending on your income before the QBI deduction is calculated.
Before you do that, consider these points:
- You can itemize and deduct expenses directly related to your business, such as for equipment and travel, as you normally would — and still take the QBI deduction, Greene-Lewis says. Business expenses are deducted on Schedule C; the QBI deduction is calculated based on net income after those Schedule C deductions. You then enter the amount of your QBI deduction on line 13 of the current Form 1040 — it’s part of the calculation that determines your taxable income.
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If you work in certain “specified service trades or businesses” (SSTB), the deduction is phased out when taxable income meets a threshold. Generally, if you make more than the income limits (in 2024, $383,900 for married filing jointly and $191,950 for all other filers), you won’t get the full deduction if your work is considered an SSTB. The list includes businesses in the health, law, accounting, performing arts and consulting fields, to name a few. High earners in fields not considered an SSTB also may receive a lower percentage QBI deduction.“As your taxable income goes up,” Wells says, “you will start to be phased out, and eventually [be] completely phased out of getting that deduction as your income gets higher.” He adds: “If you’re not in one of those specified professions, you’re still going to have a phase out” — but the calculation is different.
- A taxpayer’s QBI deduction is limited to the lesser of 20 percent of the taxpayer’s QBI or 20 percent of taxable income, excluding net capital gains. See the IRS instructions for Form 8995.
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Bottom line
Because these calculations can get complicated, it’s not a bad idea to consult a qualified tax professional for help when claiming the QBI, Wells says. In fact, he often advises anyone in business for themselves to talk to a tax professional.
Learn more: 5 tips to find the best tax preparer for your situation
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