Definition
The QBI deduction, created by Section 199A, lets eligible owners of pass-through businesses deduct up to 20% of their qualified business income on their personal tax return.
How It Works
Qualified business income is the net profit of a U.S. pass-through business such as a sole proprietorship, partnership, S-corporation, or most LLCs. It excludes wages, guaranteed payments, and most investment income. The deduction is taken on the personal return and does not require itemizing. Above income thresholds that adjust each year, two limits apply: a cap based on W-2 wages and property the business owns, and a phase-out for "specified service" businesses like law, accounting, consulting, and health.
Example
A married business owner with $300,000 of qualified income from a manufacturing S-corp, below the threshold, could deduct up to $60,000, lowering the income actually subject to tax.
When It Works Best
It delivers the most value to owners of non-service pass-through businesses with taxable income near or below the annual thresholds, where the full 20% is preserved.
Who It Applies To
Owners of sole proprietorships, partnerships, S-corporations, and LLCs taxed as pass-throughs. Service-business owners above the thresholds may receive a reduced deduction or none.
Watch-Outs
The deduction is calculated per business and interacts with S-corp reasonable-compensation rules: paying yourself a higher salary lowers QBI, while paying too little invites IRS challenge. Because the limits hinge on taxable income, retirement contributions and income timing can protect a deduction that would otherwise phase out.
