The qualified business income (QBI) deduction gives small business owners an additional tax deduction on their business income, to reduce their total taxable income. If your small business meets the qualifications, you can take this deduction on your personal tax return through the 2025 tax year.
This article explains how the QBI deduction works, how to qualify for it, and how to include it on your tax return.
- The qualified business income deduction (QBI) deduction is for business owners. It can be up to 20% of specific business income, minus capital gains.
- The deduction can be taken in addition to the normally allowable business expense deductions.
- Small business owners who pay business taxes on their personal tax returns can take this deduction, but it doesn't apply to corporations.
- This deduction is in effect through tax year 2025.
What Is Qualified Business Income?
The qualified business income deduction (QBI) allows small business owners to take a 20% deduction based on the net income of their business, in addition to regular business deductions. The details of this deduction are in section 199A of the tax code, which is why the deduction is sometimes called a 199A deduction.
QBI includes specific qualified income, gains or losses, and deductions from business income. Only items included in taxable income are counted and some business types don't qualify.
Several factors determine whether you qualify for this tax deduction (details below):
- You need to determine if your business type qualifies.
- You need to know the amount of net income from that business for the year, to see what income and deductions are qualified and which don't qualify.
- You must calculate your total taxable income from all sources for the year.
Although QBI eligibility is for business income, the deduction is for business owners, not the business. The total taxable income of the owner from all sources is counted in determining eligibility for this deduction.
Which Business Types Can Take a QBI Deduction?
Only pass-through businesses can take this deduction. In pass-through businesses, the income from the business is taxed on the owner’s personal tax return. Pass-through businesses are:
- Sole-proprietors and single-owner limited liability companies (LLCs) filing federal income taxes on Schedule C
- Partners in partnerships and multiple-member LLC owners filing partnership returns
- S corporation shareholders filing Schedule K-1 to report their share of S corporation income
Corporations are not eligible for the QBI deduction because the corporation’s income is taxed separately from that of the owner.
Specified Services Trades or Businesses (SSTBs)
Some types of businesses, called specified services trades or businesses (SSTBs), may not be eligible for the entire QBI deduction if the income of the owners is above certain limits, which change every year. These SSTBs include businesses involving the performance of services based on the reputation or skill of employees or owners (think: health care, law, accounting, performing arts, consulting, athletics, financial services, and investing).
What Type of Income Qualifies for the QBI Deduction?
Specific types of income must be removed from calculation for the qualified business income deduction. You can count most of your business's net income from business operations, but you can't include
- Business income from outside the U.S
- Income from business investments
- W-2 income (wages) paid to an S corporation owner
- Guaranteed payments to a partner
- Capital gains or losses
- Dividends and dividend equivalents
- Non-business interest income
Other less common types of income may not be included in income for the QBI calculation. See the Instructions for Form 8995 for a complete list of excluded income.
The QBI deduction may also be limited by the wages or salary paid to employees and the cost of some property owned and recently purchased by the business, called “unadjusted basis immediately after acquisition (UBIA).”
The QBI deduction is only on business income for federal income tax purposes, and it doesn’t include a deduction from self-employment tax (Social Security and Medicare tax) for small business owners.
Claiming a QBI Deduction on Your Tax Return
The QBI deduction is calculated on one of two forms, depending on the amount of your taxable income.
Form 8995 is the simplified computation form. You can use this form if your taxable income is not greater than $163,300 for an individual, $163,300 if married filing separately or married nonresident alien, or $326,600 if married filing jointly. (These amounts are for 2020 tax returns; the limits change each year.)
Form 8995-A is for more complicated situations, including SSTBs and owners of multiple businesses.
Partners and S Corporation Owners
S corporation owners and partners (including owners of LLCs taxed as partnerships) calculate the QBI deduction differently. First, the total QBI for the business is calculated on one of the two forms above. Then, each owner’s share of the QBI is calculated and entered in a separate line on the owner’s Schedule K-1, along with other income of the owner. The information on Schedule K-1 is entered with the owner’s other income on the owner’s personal tax return.
The calculation for this deduction is complicated and it’s different for each specific business. To find out if you qualify and to get help with the calculation, use tax preparation software or the services of a licensed tax professional.
Frequently Asked Questions (FAQs)
How is the qualified business income deduction calculated?
To calculate the qualified business income (QBi) deduction, you must complete your personal tax return and calculate the net income from your business.
Some non-qualified types of income, including capital gains, dividends, and non-business interest income, must be subtracted from net income.
If your total taxable income for the year is less than a specific amount for your filing type, you can use IRS Form 8995 to calculate the QBI deduction. For 2020, if your taxable income before the QBI deduction is more than $163,300 (single, married filing separately, head of household, or qualifying widow(er); or $328,600 (married filing jointly), you must use IRS Form 8995-A. The QBI calculation ultimately goes from the 8995 or 8995-A form onto your tax return.
You can use the QBI Flow Chart on page 5 of the Instructions for Form 8995 to see how the order of calculations works.
Can I claim qualified business income deductions on my rental property?
Owners of real estate rental properties may be eligible for the qualified business income (QBI) deduction if they meet certain specific requirements to be considered a "trade or business." You don't have to materially participate in the activity of renting real estate to qualify.
Each situation is reviewed based on all the facts and circumstances. If you want to take the QBI deduction for your real estate business, check with a licensed tax professional.