The 20% QBI Deduction: The Small Business Tax Break You Might Be Missing

20 percent QBI deduction for small business owners, by Robert Allen Bautista, Kansas City tax preparerSay you run a small landscaping business as a sole proprietor and your profit is $90,000. You file your taxes, and your preparer mentions a "QBI deduction" that knocked your taxable income down. You nod. You have no idea what it is.

This is one of the biggest deductions available to owners of pass-through businesses, and you do not need to spend a dime to get it. You just need to know the rules.

The rule in plain English

Section 199A lets you deduct up to 20% of your qualified business income, or QBI. It was originally set to expire after 2025. The 2025 law (the One Big Beautiful Bill Act, Public Law 119-21) removed that expiration, so the deduction is now permanent.

It applies to income from:

  • Sole proprietorships and single-member LLCs
  • Partnerships and multi-member LLCs
  • S corporations

C corporations do not qualify. The deduction is taken on your personal return. It does not reduce your self-employment tax, and it is not a business expense on Schedule C. It comes off taxable income, after your adjusted gross income.

QBI is your net business profit from a qualifying U.S. business, after the deductions that relate to it, such as half of self-employment tax, self-employed health insurance, and retirement plan contributions. Wages you earn as an employee are not QBI. For an S corp owner, the salary you pay yourself is not QBI either, only your share of profit is.

The taxable income limit

Your deduction can never be more than 20% of your taxable income (less net capital gain). So low taxable income can shrink the deduction.

Worked example: below the thresholds

Say you are married, filing jointly. Your landscaping business nets $90,000 and your spouse earns wages. Your QBI after the half-SE-tax adjustment is about $83,600.

  • 20% of QBI: about $16,700
  • Your taxable income before QBI is $120,000, and 20% of that is $24,000. The QBI amount is smaller, so $16,700 is your deduction.

In a 22% bracket, that deduction saves roughly $3,700 in federal income tax. If your taxable income before the deduction were only $67,000, your cap would be 20% of $67,000, or $13,400. The cap wins.

The 2025 income thresholds

  • $394,600 if married filing jointly
  • $197,300 for everyone else

Below the threshold, the rules are simple: take 20%, subject to the taxable income cap, using Form 8995. Above it, you need Form 8995-A and two extra limits apply. Confirm the current figures at irs.gov; they change every year.

SSTBs: the service-business trap

A specified service trade or business (SSTB) is a business in fields like health, law, accounting, consulting, financial services, performing arts, athletics, or one where the main asset is your reputation or skill. For 2025:

  • Below the threshold: SSTB income counts like any other.
  • Inside the phase-in range ($50,000 above the threshold for single filers, $100,000 for joint filers): only part of the income counts.
  • Above the phase-in range: SSTB income gets no QBI deduction at all.

What changed: the 2025 law widens the phase-in range starting in 2026, to $75,000 for single filers and $150,000 for joint filers.

W-2 wage and property limits

Above the threshold, your deduction can be limited to the greater of 50% of the W-2 wages your business paid, or 25% of W-2 wages plus 2.5% of the original cost (UBIA) of depreciable property you still own. A high-earning owner with no employees and no equipment can see the deduction squeezed.

The new minimum deduction

For tax years beginning after 2025, the 2025 law adds a minimum QBI deduction of $400 for people who materially participate in an active business and have at least $1,000 of qualified business income, indexed for inflation after 2026.

What most owners miss

  • The deduction is capped by your taxable income, so a big other deduction can shrink it.
  • Treating your S corp salary as QBI is a common error.
  • In an S corp, a higher salary lowers QBI but can raise the wage limit. Run it both ways.
  • SSTB owners just over the line should rerun the numbers under the wider 2026 phase-in.

The QBI deduction is permanent, automatic if you qualify, and worth checking every single year.

Adapted from my book, The Small Business Tax Code, Unlocked. Sources: IRS, "Qualified Business Income Deduction"; Instructions for Forms 8995 and 8995-A; 26 U.S.C. section 199A as amended by Pub. L. 119-21. General information, not advice for your specific situation.

Robert Allen Bautista — robertallenbautista.wixsite.com/taxpro

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