A Practical Guide to the QBI Deduction for Small Business Owners
The Qualified Business Income (QBI) deduction is one of the most valuable tax benefits available to owners of pass-through businesses. If you run a sole proprietorship, LLC, partnership, or S-corporation, this deduction may reduce your taxable income by up to 20%, leading to meaningful tax savings each year.
Recent legislative updates have also made the deduction more predictable and beneficial for active small business owners.
What the QBI Deduction Is
The QBI deduction allows eligible business owners to deduct 20% of their qualified business income.
QBI typically includes the net profit from your U.S. trade or business after ordinary deductions.
It does not include:
- W-2 wages you pay yourself
- Guaranteed payments to partners
- Capital gains
- Investment income unrelated to the business
If you operate multiple businesses, each one’s QBI is calculated separately, then combined on your personal tax return.
Who Qualifies
Most pass-through entities are eligible, including:
- Sole proprietorships
- Partnerships and LLCs
- S-corporations
- Certain trusts and estates
If your taxable income falls below the IRS threshold, you typically receive the full 20% deduction without additional limitations.
When High Income Triggers Limits
If your taxable income rises above the IRS threshold, your QBI deduction may be limited based on:
- W-2 wages paid by the business
- Unadjusted basis of qualified property (UBIA)
These limitations prevent high earners from receiving the full deduction unless their business has sufficient payroll or qualifying assets.
Some professions — known as Specified Service Trades or Businesses (SSTBs) — face additional phase-outs at high incomes. These include:
- Health
- Law
- Accounting
- Consulting
- Performing arts
- Financial services
- Businesses where the owner’s skill or reputation is the main asset
What Changed Under the 2025 OBB Law
The 2025 “One Big Beautiful Bill Act” introduced two major improvements:
1. The deduction is now permanent
Originally set to expire after 2025, the QBI deduction is now a permanent part of the tax code, giving business owners long-term certainty.
2. New minimum deduction for active owners
Beginning after 2025, active business owners with at least $1,000 in QBI will receive a minimum $400 deduction (indexed for inflation).
This ensures that smaller but active businesses still benefit each year.
Why This Deduction Matters
The QBI deduction can significantly reduce your federal tax burden. For example:
- A business with $100,000 in qualifying income could receive a $20,000 deduction, reducing taxable income to $80,000.
- S-corp owners may optimize their mix of wages and distributions to maximize QBI.
- Rental property owners may qualify if they meet IRS real estate safe-harbor rules.
Now that the deduction is permanent, business owners can build multi-year strategies with confidence.
Key Takeaways
- The QBI deduction can reduce taxable income by up to 20%.
- High-income taxpayers may face wage/property limits or SSTB phase-outs.
- The OBB Act made the deduction permanent and added a minimum $400 deduction for active businesses.
- Accurate records — wages, property basis, income classification — are essential.
Looking to maximize your QBI deduction for 2025 and beyond?
Let us help you apply the rules correctly and capture every available tax advantage.