The QBI deduction under Section 199A is a valuable tax break that lets eligible pass-through businesses—such as sole proprietorships, partnerships, and S corporations—deduct up to 20% of their qualified items of income from their taxable income.
As the 2025 tax year approaches, understanding how to calculate the deduction, determine eligibility, and file Form 8995 or 8995-A is essential for reducing your federal income tax liability. In this article, explore who qualifies, how to calculate your deduction, and how to claim it on your 2025 tax return.
What Is the QBI Deduction and How Does It Work?
What does the QBI deduction cover?
The Qualified Business Income (QBI) deduction, also called the Section 199A deduction, allows eligible small business owners to deduct up to 20 percent of their net amount of qualified items from a pass-through business. This includes:
- Sole proprietorships (domestic business operated by individuals)
- Partnerships (including LLCs taxed as partnerships)
- S corporations (businesses electing pass-through taxation)
- Trusts and estates (some trusts and estates may be eligible for the deduction)
However, income earned through a C corporation does not qualify for the deduction. Likewise, wages paid to employees do not count as QBI—only business profits from a qualified trade or business apply.
Also, income from a rental real estate enterprise may qualify if it is treated as a trade or business for purposes of section 199A. To determine whether your business meets this qualification, refer to the Instructions for Form 8995 or Form 8995-A.
How does the deduction work?
The deduction under Section 199A has two components:
- QBI Component – Deduction equals 20 percent of QBI from a domestic business operated as a sole proprietorship, partnership, S corporation, or trust.
- REIT/PTP Component – Deduction equals 20 percent of qualified REIT dividends and qualified publicly traded partnership (PTP) income.
Important: The deduction is limited to the lesser of:
- 20% of QBI (or 20% of qualified REIT dividends and qualified publicly traded partnership income), OR
- 20% of taxable income minus net capital gain.
The deduction applies whether you take the standard deduction or itemize. However, if your taxable income reaches the phase-out range, additional limitations apply based on W-2 wages paid and the value of qualified property held by the business.
Further Reading: Learn how to navigate your small business's qualified business income
Who Qualifies for the QBI Deduction?
What types of businesses qualify for the QBI deduction?
To qualify for the pass-through deduction, your business must be classified as a pass-through entity:
- Sole proprietorships (freelancers, independent contractors, small businesses)
- Partnerships (LLCs taxed as partnerships included)
- S corporations (business owners receiving pass-through income)
- Some trusts and estates
However, C corporations do not qualify because they are separately taxed entities.
Additionally, a business is a specified service trade or business (SSTB) if it provides services in the fields of:
- Health
- Law
- Accounting
- Consulting
- Financial services
- Actuarial science
- Performing arts
- Athletics
SSTBs face stricter limitations based on the taxpayer’s income. If your taxable income for the year exceeds the phase-out range, you may not qualify for the deduction.
What are the income limits for claiming the QBI deduction?
Your deduction depends on your total taxable income:
For 2024 taxes (filed in 2025):
Full deduction applies if your taxable income is:
- Single filers: $191,950 or less
- Married filing jointly: $383,900 or less
Phase-out range (limited deduction applies):
- Single filers: $191,951 – $241,950
- Married filing jointly: $383,901 – $483,900
If your taxpayer’s taxable income exceeds the phase-out limit, your deduction may be reduced or eliminated depending on:
- Whether your business is a specified service trade or business
- W-2 wages paid by the business
- Qualified property held by the trade or business
For businesses above the phase-out range, the deduction is subject to the greater of:
- 50% of W-2 wages paid, OR
- 25% of W-2 wages paid plus 2.5% of the unadjusted basis of qualified property held by the business.
Example: If you run a service trade or business for purposes of Section 199A and earn $500,000 as a single filer, you won’t qualify for the deduction because your taxpayer’s income exceeds the phase-out limit.
Further Reading: Discover how to maximize your tax savings with Form 8995 and 8995-A
How to Calculate the QBI Deduction for Your Business?
How do you determine your QBI?
Your qualified business income (QBI) is the net amount of qualified items from your pass-through business after accounting for:
- Gross income from business operations
- Deductions for contributions to qualified retirement plans (e.g., SEP IRA, SIMPLE IRA, solo 401(k))
- Deductible self-employment tax
- Self-employed health insurance deduction
However, QBI does NOT include:
- Capital gains or losses
- Dividends and interest income (unless related to the trade or business for purposes of Section 199A)
- Wage income (payments received for providing services as an employee)
- Foreign income
What is the formula for calculating the QBI deduction?
If your taxable income is below the phase-out threshold, the calculation is simple:
QBI × 20%
If your taxable income is above the phase-out range, apply these additional limitations:
- Lesser of:
- 20% of QBI
- Greater of:
- 50% of W-2 wages paid
- 25% of W-2 wages + 2.5% of the unadjusted basis of qualified property held
Example Calculation
Let’s say your domestic business operated as an S corporation earns $200,000 in QBI.
- If your taxpayer’s income is below $191,950, your deduction equals 20 percent of QBI:
$200,000 × 20% = $40,000 deduction. - If your taxable income reaches the phase-out range, you may need to calculate based on wages paid or qualified property held.
Further Reading: Learn how to maximize your tax savings with the Section 199A deduction
How to Claim the QBI Deduction on Your 2025 Tax Return?
What tax forms do you need for the QBI deduction?
To claim the Section 199A deduction, you’ll need:
- Form 1040 (U.S. Individual Income Tax Return)
- Form 8995 (for taxpayers under the income limit)
- Form 8995-A (for taxpayers above the income threshold, accounting for wage and property limitations)
If your business is a specified service trade or business (SSTB) and your income exceeds the limit, use Form 8995-A to calculate the limited deduction.
What are common mistakes when filing for the QBI deduction?
Misclassifying your business: Your deduction eligibility depends on the type of business. If you’re an SSTB over the income limit, you won’t qualify for the 20% deduction.
Forgetting deductions that reduce QBI: Contributions to qualified retirement plans, self-employment tax, and health insurance reduce the amount of QBI and impact your deduction.
Not factoring in wage/property limitations: If you earn above the phase-out limit, your deduction may qualify only if your business has W-2 wages paid or qualified property held.
Key Takeaways
- The Section 199A deduction under the Tax Cuts and Jobs Act lets eligible for the qualified business owners deduct up to 20% of qualified items of income, but the deduction may be limited by taxable income.
- If your business is an SSTB, your ability to claim the deduction may still be treated differently if your taxpayer’s taxable income exceeds the threshold.
- The deduction includes 20% of QBI and 20% of qualified real estate investment trust dividends and PTP income that qualifies.
- If your taxable income exceeds $191,950 (single) or $383,900 (married filing jointly) for the 2024 tax year, your deduction may be limited based on W-2 wages paid and qualified property held.
- To claim, file Form 8995 or Form 8995-A—the Internal Revenue Service requires accuracy, especially if you own an interest in rental real estate or operate a Section 162 trade or business.
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