The qualified business income (QBI) deduction under Section 199A allows eligible self-employed individuals and small business owners to deduct up to 20% of their qualified business income from their taxable income. This applies to sole proprietors, partnerships, S-corporations, and certain trusts and estates. For 2024, the deduction begins to phase out at $191,950 for single filers and $383,900 for married filing jointly. Certain specified service trades or businesses (SSTBs) face additional limitations above these thresholds.
Key Takeaways
- Deduct up to 20% of qualified business income — this is on top of all other deductions
- Available to pass-through entities: sole proprietors, partnerships, S-corps, LLCs
- NOT available to C-corporations (they have their own rate structure)
- Phase-out begins at $191,950 (single) / $383,900 (MFJ) for 2024
- Specified Service Trades or Businesses (SSTBs) face complete phase-out above income thresholds
- The QBI deduction was created by the Tax Cuts and Jobs Act and is currently set to expire after 2025 (may be extended)
How the QBI Deduction Works
Basic Calculation (Below Phase-Out Threshold):
- Calculate your qualified business income (generally net business profit)
- Multiply by 20%
- The deduction is the LESSER of: 20% of QBI OR 20% of taxable income (before QBI deduction)
Example:
- Schedule C net profit: $100,000
- QBI deduction: $100,000 × 20% = $20,000
- Taxable business income after QBI: $80,000
- At 22% bracket, the QBI deduction saves: ~$4,400
Income Phase-Out Rules (2024)
Income Range (Single) | Income Range (MFJ) | Impact |
Below $191,950 | Below $383,900 | Full 20% deduction |
$191,950 – $241,950 | $383,900 – $483,900 | Partial deduction (phasing out) |
Above $241,950 | Above $483,900 | W-2 wage/UBIA limitation applies; SSTBs get $0 |
Specified Service Trades or Businesses (SSTBs)
These industries face additional QBI restrictions above the income thresholds:
- Health (doctors, dentists, veterinarians)
- Law
- Accounting
- Actuarial science
- Performing arts
- Consulting
- Athletics
- Financial services
- Brokerage services
- Any business where the principal asset is the reputation or skill of its owners
Below the threshold: SSTBs get the full QBI deduction.
Above the threshold: The deduction phases out completely.
Important: Engineering and architecture are specifically EXCLUDED from the SSTB definition — they get QBI even above the thresholds.
Strategies to Maximize QBI
- Manage taxable income — Stay below the phase-out threshold through retirement contributions, timing, and other deductions
- Maximize business deductions — The QBI deduction is calculated on NET business income, so other deductions reduce QBI. But the overall tax savings from deductions + QBI together is still greater.
- Consider entity structure — S-corp reasonable salary reduces QBI (only profit counts as QBI, not W-2 wages). This requires careful optimization.
- Aggregate businesses — If you own multiple businesses, you may be able to aggregate them for QBI purposes to meet W-2 wage and UBIA limitations
Frequently Asked Questions
Does QBI apply to rental income?
It depends. Rental income may qualify for QBI if the rental activity rises to the level of a trade or business. The IRS provides a safe harbor for landlords who spend 250+ hours per year on rental activities.
Can I claim QBI and other deductions at the same time?
Yes. QBI is calculated after your other business deductions. You claim all your Schedule C deductions first, then QBI is calculated on the remaining net profit.
Is the QBI deduction going away?
The QBI deduction is set to expire after December 31, 2025, unless Congress extends it. Recent legislation (including the "Big Beautiful Bill") has proposed making it permanent. Tax Sherpa monitors legislative developments and adjusts client strategies accordingly.
Optimize your QBI deduction → Book a Tax Sherpa consultation