The 2017 Tax Cuts and Jobs Act changed the playing field with a significant qualified business income deduction for a “qualified trade or business,” excluding corporations. This new deduction is equal to 20% of a taxpayer’s “qualified business income” (QBI). On July 4, 2025, President Trump signed the One Big Beautiful Bill (OBBB) into law, making the QBI deduction permanent.
The QBI deduction is calculated by netting the total amount of qualified income, gain, deduction, and loss from any qualified trade or business. This only includes items that are taxable income and relate to a trade or business in the United States. Capital gains and losses, certain dividends, and interest income are some of the excluded items. Here’s what you should know about claiming the QBI deduction.
Who is eligible for the qualified business income deduction?
Section 199A of the tax code allows tax breaks for owners of sole proprietorships, S corporations, and partnerships. Owners of pass-through entities may be eligible to claim the qualified business income (QBI) deduction on an individual return. The QBI deduction is a below-the-line deduction, meaning it directly reduces your taxable income. If eligible, business owners can claim this deduction whether they itemize or take the standard deduction.
At the cooperative level, trust and estates (including farmers) may also qualify for the QBI deduction. However, the tax code includes exceptions for companies that are considered a Specified Service Trade or Businesses (SSTB).
An SSTB is a business focused on providing services rather than selling goods in certain professional fields. The following list highlights examples of industries and services classified as a Specified Service Trade or Business:
- Health: Services provided by doctors, nurses, and other clinicians
- Law: Legal services from attorneys, mediators, or paralegals
- Accounting: Financial management or tax preparation services
- Actuarial science: Services for risk assessment in finance and insurance
- Performing arts: Services provided by musicians, entertainers, or actors
- Consulting: Advice or counsel provided to clients in any field
- Athletics: Professional sports services including athletes, coaches, and trainers
- Financial services: Investing advice and wealth management
- Investing and investment management: Portfolio management services
- Trading: Brokerage and trading services in financial markets
As of 2024, for taxpayers filing jointly with a taxable income above $364,200, or single filers with a taxable income exceeding $182,100, the QBI deduction starts to phase out. If your income surpasses these thresholds and you work in specific fields, your deduction may be limited, or you may not qualify for it at all.
What is considered qualified business income?
To claim the OBI deduction, you will need to have qualified business income. Qualified Business Income (QBI) encompasses the net income earned from businesses filing as pass-through entities, such as sole proprietorships, partnerships, S corporations, and certain trusts and estates. Essentially, QBI includes the profits a business earns through its operations, which are then passed down to the owners or shareholders and taxed at individual income tax rates.
Note: QBI does not cover investment-related income like capital gains, dividends, interest unrelated to the business’s operations, or wage income received as an employee.
What businesses do not qualify for the QBI deduction?
Not all businesses can take advantage of the QBI deduction. For example, C Corporations do not qualify for the QBI deductions since they’re taxed separately from their owners. Service-based businesses like professionals in health, law, accounting, performing arts, and consulting may be limited in the amount they can claim. If your income exceeds certain thresholds, the QBI deduction may phase out or become unavailable.
If you are a salaried employee, the money you earn from traditional employment, as opposed to business operations, doesn’t count as QBI. So, wages or salaries you receive can’t be considered for this deduction. Additionally, the QBI deduction doesn’t apply to passive income streams like capital gains, dividends, or interest unrelated to active business operations.
QBI deduction limitations
If your income is less than the specified amount in a service business, then you will be able to deduct the lesser of:
- 20% percent of your taxable income minus your net capital gains, or
- 20% of your QBI, plus 20% of your qualified Real Estate Investment Trust (REIT) dividends and qualified Publicly Traded Partnership (PTP) income
The QBI deduction for a non-service business is limited to the lesser of these numbers:
- 20% of total qualified business income, or
- The greater of either (1) 50% of the individual’s W-2 wages from the trade or business or (2) sum of 25% of the W-2 wages from the trade or business, plus 2.5% of the unadjusted basis after the acquisition of qualified property
Note: For more details the IRS provides an FAQs on limitations to QBI deductions, which guides you through the ways your SSTB may be impacted.
How is the QBI deduction calculated?
The QBI deduction allows individuals to deduct up to 20% of their qualified business income from their taxable income. To calculate the QBI deduction, you’ll start by totaling your qualified business income, which includes the net amount of qualified items of income from any qualified trade or business. For the QBI deduction, qualified business income does not include employee wages, capital gains, interest, and dividend income.
After calculating your total QBI, the deduction can be up to 20% of this amount, but it’s also subject to limitations based on your taxable income and the type of business you operate.
For example, let’s say you own a small consulting business that qualifies for the QBI deduction, and your business earns $100,000 in qualified income for the year. If your total taxable income is below the threshold set by the IRS for your filing status, you could potentially take a QBI deduction of $20,000 (20% of $100,000). However, if your income exceeds the threshold, the deduction may be limited based on factors such as employee wages.
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