If there’s one tax benefit that business owners should fully understand, it’s the Qualified Business Income (QBI) deduction. Introduced as part of the Tax Cuts and Jobs Act of 2017, this powerful tax provision allows eligible business owners to deduct up to 20% of their qualified business income on their personal tax returns. For many business owners, this can translate into significant tax savings each year—dollars that can be reinvested in your business or personal wealth-building strategies.
What is the QBI Deduction?
The QBI deduction allows eligible business owners to deduct up to 20% of qualified business income from their taxable income. Think of it as the government’s way of giving pass-through business owners a tax benefit similar to what corporations received when the corporate tax rate was reduced from 35% to 21%.1
For example, if your qualified business income is $200,000, you could potentially deduct $40,000 (20% of $200,000) from your taxable income. For someone in the 35% tax bracket, that could be a federal tax savings of $14,000—just from this one deduction.
Who Qualifies? Understanding Pass-Through Entities
The QBI deduction applies specifically to “pass-through” business entities, where business income passes through to the owners’ personal tax returns. These include:
- Sole proprietorships (Schedule C businesses)
- Partnerships
- S Corporations
- LLCs taxed as any of the above
- Certain trusts and estates
If you’re a C Corporation owner, unfortunately, you don’t qualify for the QBI deduction. C Corporations already benefit from the reduced 21% corporate tax rate, so they were excluded from this particular tax provision.
Income Limitations: Where Things Get Complicated
Like many tax benefits, the QBI deduction comes with income limitations and phase-outs. This is where careful planning becomes crucial.
For 2025, the full deduction is available to:
- Single filers with taxable income below $197,300
- Married filing jointly with taxable income below $394,600
These thresholds are adjusted annually for inflation. If your taxable income exceeds these thresholds, the deduction doesn’t disappear entirely, but it does become more restricted, especially depending on your business type.
SSTBs vs. Non-SSTBs: A Critical Distinction
One of the most important factors affecting your QBI deduction is whether your business is classified as a Specified Service Trade or Business (SSTB) or a non-SSTB.
What is an SSTB?
An SSTB is generally a service-based business where the principal asset is the reputation or skill of one or more employees or owners. These include:
- Health professionals (doctors, dentists)
- Lawyers
- Accountants
- Financial advisors and investment managers
- Consultants
- Athletes
- Performers
- And similar service-based professions
What happens if you’re an SSTB?
If your taxable income exceeds the thresholds mentioned above, your QBI deduction begins to phase out. Once you reach $247,300 (single) or $494,600 (married filing jointly) in 2025, the deduction disappears completely if you’re an SSTB.
What if you’re a non-SSTB?
For non-SSTBs (like retail, manufacturing, real estate, etc.), the deduction doesn’t phase out completely at higher income levels. Instead, it becomes subject to wage and capital limitations.
The Wage and Capital Limitation for High-Income Non-SSTBs
Here’s where the strategy gets interesting. For non-SSTBs with income above the thresholds, the QBI deduction becomes the lesser of:
- 20% of qualified business income, or
- The greater of:
- 50% of W-2 wages paid by the business, or
- 25% of W-2 wages plus 2.5% of the unadjusted basis of qualified property
This formula means that high-income business owners need to consider their W-2 wage structures and business assets when maximizing the deduction.
Strategies to Maximize Your QBI Deduction
1. Manage Your Taxable Income
If you’re near the income thresholds, strategies to reduce your taxable income can help maximize your QBI deduction:
- Pre-tax retirement plan contributions
- Utilize health savings accounts (HSAs) – but, you need to be on a high-deductible health plan to use one of these.
- Time your income and deductions strategically
2. Optimize Your S Corporation Compensation
For S Corporation owners, finding the right balance for your salary is critical:
- If your income is below the threshold: A lower (but still reasonable) salary may increase your QBI deduction, as W-2 wages don’t qualify for the deduction.
- If your income is above the threshold and you’re a non-SSTB: You might want to increase your W-2 wages to maximize the wage limitation aspect of the deduction.
Let’s look at a hypothetical example:
Imagine you own a non-SSTB S Corporation with $500,000 in business income and you are the corporation’s sole employee. Your taxable income puts you above the QBI threshold.
Scenario A: You pay yourself a salary of $100,000
- QBI = $400,000 ($500,000 – $100,000)
- 20% of QBI = $80,000
- 50% of W-2 wages = $50,000
- Your QBI deduction would be limited to $50,000
Scenario B: You pay yourself a salary of $200,000
- QBI = $300,000 ($500,000 – $200,000)
- 20% of QBI = $60,000
- 50% of W-2 wages = $100,000
- Your QBI deduction would be $60,000
By increasing your salary, you’ve increased your QBI deduction from $50,000 to $60,000, providing meaningful savings especially if you’re in a higher tax bracket. Note that increasing the owner’s compensation, increases the FICA taxes that are payable on that compensation.
3. Consider Your Business Structure
The QBI rules may make one business structure more favorable than another, depending on your situation:
- Sole proprietors without employees have no W-2 wages, potentially limiting their deduction at higher income levels.
- S Corporations allow for salary optimization strategies.
- Rental real estate may qualify for the deduction and benefit from the 2.5% of unadjusted basis rule.
4. Aggregate or Separate Businesses
If you own multiple businesses, you may benefit from aggregating them or keeping them separate for QBI purposes. This complex decision should be made with professional guidance.
The Bottom Line
The QBI deduction can be a significant tax benefit for business owners, but maximizing it requires careful planning and potentially adjusting your business practices. The deduction is currently set to expire after 2025, making it even more important to take advantage while it’s available.
As with all tax strategies, a one-size-fits-all approach doesn’t work. Your optimal strategy depends on your specific business type, income level, and overall financial situation. Working with proactive financial and tax advisors is essential to helping ensure you’re maximizing this powerful deduction while maintaining compliance with IRS requirements.
The complexities of the QBI deduction underscore why tax planning should be done well before year-end. By understanding these rules and working with the right professionals, you can potentially save substantially in taxes while positioning your business for long-term financial success.
1 “Qualified Business Income Deduction.” Internal Revenue Service, www.irs.gov/newsroom/qualified-business-income-deduction. Accessed 20 May 2025.
The information provided in this article is for educational purposes only and should not be construed as tax, legal, or investment advice. Please consult with qualified tax and financial professionals before implementing any strategy. Any examples shown are for illustrative purposes only; your results will vary based on your personal situation.
CRN202710-8548345
