Estimate your Section 199A qualified business income deduction for pass-through entities
The Qualified Business Income (QBI) deduction, also known as the Section 199A deduction, allows eligible self-employed taxpayers and small business owners to deduct up to 20% of their qualified business income from their taxable income. This deduction was introduced by the Tax Cuts and Jobs Act of 2017 to provide tax relief to pass-through business owners.
At its simplest, the QBI deduction equals 20% of your qualified business income. For taxpayers with taxable income below the threshold amounts ($197,300 single / $394,600 MFJ for 2025), this is the entire calculation - no additional limitations apply.
Once your taxable income exceeds the threshold, additional limitations come into play:
Qualified Business Income includes net income from:
The QBI deduction is available to taxpayers with "qualified business income" from a "qualified trade or business." Let me break down these requirements.
Rental activities must rise to the level of a "trade or business" to qualify. The IRS provides a safe harbor requiring:
SSTBs face the most restrictive QBI limitations. If your business falls into an SSTB category AND your income exceeds the threshold, your deduction is reduced or eliminated entirely.
For SSTBs, the deduction phases out completely above the upper limit:
Strategic planning can significantly increase your QBI deduction. Here are key strategies based on your situation.
If your income is near the threshold, consider:
For non-SSTB businesses above the threshold:
The 2.5% qualified property component helps capital-intensive businesses:
The QBI deduction expires after 2025 unless extended:
Several limitations can reduce your QBI deduction below the simple 20% calculation.
Above the income threshold, your deduction is limited to the GREATER of:
This limitation phases in over the phase-out range ($100K single / $200K MFJ).
Your QBI deduction can NEVER exceed 20% of your taxable income (minus net capital gains). This prevents using QBI to generate a tax loss.
For Specified Service businesses, both the QBI amount AND the W-2/property amounts are reduced as income increases through the phase-out range. Above the upper limit, no deduction is allowed.
If your qualified business has a loss:
You may be able to aggregate multiple businesses if they meet certain requirements:
Aggregation can help by combining W-2 wages and property across businesses.
The QBI deduction involves complex calculations and planning opportunities. I recommend consulting with:
Comprehensive answers to common questions about the QBI deduction.
The Qualified Business Income (QBI) deduction, also known as the Section 199A deduction, allows eligible self-employed taxpayers and small business owners to deduct up to 20% of their qualified business income from their taxable income. This deduction was introduced by the Tax Cuts and Jobs Act of 2017 and applies to pass-through entities like sole proprietorships, partnerships, S corporations, and some trusts and estates. It's a "below the line" deduction that reduces taxable income but not AGI or self-employment tax.
For 2025, the QBI deduction begins to phase out at taxable income of $197,300 for single filers and $394,600 for married filing jointly. The phase-out range is $100,000 for single filers (upper limit $297,300) and $200,000 for married filing jointly (upper limit $594,600). Below the threshold, you get the full 20% deduction without W-2 wage or SSTB limitations. Above the upper limit, full limitations apply (and SSTBs get zero deduction).
No. The QBI deduction is a "below the line" deduction that reduces your taxable income, not your adjusted gross income (AGI). Self-employment tax is calculated on your net self-employment earnings before the QBI deduction is applied. The QBI deduction only reduces your income tax liability, not FICA/SE taxes. To reduce self-employment tax, you'd need strategies like S-Corp election.
Yes! The QBI deduction is separate from and in addition to your standard or itemized deduction. You can claim both. The QBI deduction is calculated after you've already subtracted your standard/itemized deduction to arrive at taxable income. Many taxpayers benefit from both the standard deduction AND the QBI deduction in the same year.
Specified Service Trades or Businesses include: health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, and any business where the principal asset is the reputation or skill of employees. SSTBs face stricter QBI limitations - the deduction phases out completely above certain income thresholds. Below the threshold, SSTBs get the same treatment as other businesses.
Not always. The IRS defines consulting narrowly as providing professional advice to help clients achieve goals. Training, workshops, and educational services generally are NOT consulting. Product sales with incidental advice are NOT consulting. The key question is whether you're providing advice based on expertise or delivering a tangible product/service. Many "consultants" actually provide implementation services that may not be SSTBs.
Yes, with proper structuring. If your business has both SSTB and non-SSTB components, you may be able to separate them into different entities. For example, a law firm that also sells legal document templates could separate the product sales. However, the IRS scrutinizes these arrangements - the separation must have legitimate business purpose and the activities must be truly distinct. Consult a tax professional before restructuring.
When your taxable income exceeds the threshold, your QBI deduction becomes limited to the GREATER of: (1) 50% of W-2 wages paid by the business, OR (2) 25% of W-2 wages plus 2.5% of qualified property basis. This limitation phases in over the phase-out range. If you have no employees and no qualified property, and you're above the threshold, your QBI deduction could be significantly reduced or eliminated (for non-SSTBs).
Yes! If you're an S-Corp shareholder-employee, the W-2 wages you pay yourself count toward the W-2 wage limitation. This is one reason S-Corp election can be beneficial for QBI purposes - your reasonable salary creates W-2 wages that help increase the limitation. However, those wages themselves don't qualify as QBI - only your K-1 income does.
Qualified property is tangible, depreciable property (not land) used in your trade or business that's still within its depreciable period at year-end. This includes equipment, machinery, vehicles, furniture, computers, and buildings. The "unadjusted basis" is the original cost before depreciation. Property must be owned (not leased) and actively used in the business. The property must still be within its depreciable life at the end of the tax year.
It depends on your income level. Below the threshold, S-Corp status doesn't directly help QBI (you'd get full 20% either way). Above the threshold, S-Corp can help by creating W-2 wages that increase the limitation. However, the W-2 salary itself doesn't count as QBI - only the remaining K-1 income does. S-Corp election involves trade-offs including payroll costs, SE tax savings, and administrative complexity. Run the numbers both ways.
Several strategies can reduce taxable income: (1) Maximize retirement contributions (SEP-IRA up to $69,000, Solo 401(k), defined benefit plans), (2) HSA contributions ($4,150/$8,300 for 2025), (3) Defer income to next year by delaying invoicing, (4) Accelerate deductions by prepaying expenses, (5) Harvest investment losses to offset gains. Each dollar of taxable income reduction below the threshold preserves your full QBI deduction.
The Section 199A QBI deduction is currently scheduled to expire after December 31, 2025, unless Congress extends it. This means 2025 may be the last year to claim this valuable deduction. Business owners should consider: (1) Accelerating income into 2025 while the deduction exists, (2) Deferring deductions to 2026 when they may be more valuable, (3) Reviewing entity structure for post-QBI tax environment. Congressional action could extend the deduction, but planning should assume sunset.
Rental real estate CAN qualify, but it must rise to the level of a "trade or business." The IRS provides a safe harbor requiring 250+ hours of rental services annually, separate books/records, and contemporaneous time tracking. Even without the safe harbor, rentals can qualify if you're regularly and continuously involved. Triple-net leases and minimal-activity rentals generally don't qualify. Rental to your own business doesn't qualify.
QBI is calculated separately for each qualified trade or business, then combined. Losses from one business reduce QBI from others. You may be able to "aggregate" businesses that share common ownership and business elements - this can help by combining W-2 wages and property across entities. SSTB businesses generally cannot be aggregated with non-SSTB businesses. Aggregation requires careful documentation and election.
Guaranteed payments to partners for services rendered do NOT count as QBI for the receiving partner. They're treated more like wages. However, guaranteed payments for use of capital (like interest) may qualify as QBI. This creates planning opportunities - partners above the threshold might prefer distributive share income (QBI) over guaranteed payments. Partners below the threshold are unaffected since they get full 20% either way.
Need help maximizing your QBI deduction or planning for the 2025 sunset? I offer consultations on pass-through entity taxation and business structure optimization.