Qualified Business Income (QBI) Deduction

The Qualified Business Income (QBI) deduction was created by the Tax Cuts and Jobs Act of 2017 and allows owners of pass-through businesses (sole proprietorships, partnerships, S-Corporations, and some trusts and estates) to deduct up to 20% of their qualified business income on their personal tax return. The deduction is taken below the line (it reduces taxable income but not adjusted gross income) and is available regardless of whether you take the standard deduction or itemize.

For taxpayers with taxable income below certain thresholds ($197,300 for single filers and $394,600 for married filing jointly in 2025), the deduction is straightforward: 20% of QBI, subject to the overall limitation of 20% of taxable income (before the QBI deduction). Above these thresholds, limitations begin to phase in based on the type of business, W-2 wages paid, and the unadjusted basis of qualified property held by the business.

Specified service trades or businesses (SSTBs), which include fields such as health, law, accounting, actuarial science, performing arts, consulting, athletics, and financial services, face additional restrictions. Above the income thresholds, the QBI deduction for SSTBs phases out entirely. This means that high-earning professionals in these fields may receive a reduced deduction or no deduction at all. Notably, engineering and architecture firms were specifically excluded from the SSTB definition and remain eligible for the full deduction regardless of income.

The QBI deduction is currently scheduled to expire after December 31, 2025, unless extended by new legislation. If the deduction sunsets, pass-through business owners could see a meaningful increase in their effective tax rate. This potential change is worth monitoring, as it may affect decisions about business structure, timing of income recognition, and retirement plan contributions.

Planning around the QBI deduction may involve strategies such as maximizing retirement plan contributions (which reduce QBI and taxable income), managing the timing of business income and deductions, ensuring the business pays adequate W-2 wages if above the threshold, and evaluating whether the business structure provides the most favorable QBI treatment.