QBI Deduction Guide: Can You Claim It & How To Do So

The Qualified Business Income deduction, introduced as part of the Tax Cuts and Jobs Act of 2017 (TCJA), gives eligible small business owners a chance to significantly reduce their taxable income. For many pass-through entities, including sole proprietors, partnerships, S corporations, and some limited liability companies (LLCs), this deduction can be worth up to 20% of qualified business income. But here's the catch: taking full advantage of it means navigating a maze of rules, limitations, and calculations.

In this guide, we break down all you need to know about this deduction, including: 

• How it works

• Who qualifies

• How to calculate it

• How you can position your business to benefit

• Key scenarios

• Common mistakes

• The possible 2025 sunset that could impact future deductions

This guide aims to demystify the Qualified Business Income deduction for small business owners. However, to navigate its complexities effectively, businesses often turn to professional financial services for support.

Decoding the Qualified Business Income (QBI) Deduction: The Essentials

What Is the QBI Deduction?

The QBI deduction, also known as the Section 199A deduction, allows eligible small business owners to deduct up to 20% of their qualified business income on their personal tax return.

There are two main components of this deduction:

• Up to 20% of qualified income from a U.S.-based trade or business

• Up to 20% of qualified REIT dividends and Publicly Traded Partnership (PTP) income

If you qualify, the deduction lowers your taxable income, which can lead to a significantly lower tax bill. However, the benefit depends on your: 

• Business type

• Income level

• How your compensation is structured

Who qualifies? Understanding QBI Deduction Eligibility

To qualify, your business must be a pass-through entity, such as:

• Sole proprietorship

• Partnership

• S corporation

• LLCs taxed as any of the above

C corporations are not eligible. W-2 income earned as an employee doesn’t qualify either.

QBI generally includes net income from your trade or business and excludes:

• Capital gains or losses

• Dividends and investment income

• Interest income not tied to the business

• Reasonable compensation (for S corp owners)

• Guaranteed payments to partners

This is where it gets tricky. What counts as QBI can vary depending on your specific industry, and identifying eligible income is key to taking the deduction properly. Expert CPAs and tax professionals, with extensive experience in multiple states and industries, can help your business accurately determine its eligibility.

Income thresholds and phase-outs for the QBI deduction

Your total taxable income determines whether you get the full deduction, a limited one, or none at all.

For 2025:

• Full deduction if taxable income is ≤ $197,300 (single) or $394,600 (married filing jointly)

• Deduction begins to phase out between $197,301 - $247,300 (single) or $394,601 - $494,600 (joint)

• Above the top threshold, additional limits apply, or the deduction may be eliminated entirely

Strategic planning and tax advisory can help you manage income and deductions to ensure you stay under key thresholds.

Calculating Your QBI Deduction: A Step-by-Step Guide

Defining and calculating Qualified Business Income

QBI involves certain items from a qualified trade, including: 

• Net income 

• Gains 

• Deductions 

• Losses

If you're under the income threshold, your deduction is simply the lesser of 20% of your QBI or 20% of your taxable income (excluding capital gains). If you're above the threshold, things get more nuanced.

Limitations: W-2 wages and Unadjusted Basis Immediately After Acquisition (UBIA) of qualified property

The QBI deduction for taxpayers above the income thresholds becomes subject to limitations based on W-2 wages paid by the business and/or the UBIA of qualified property. For high earners, the deduction is limited to:

• The lesser of 20% of QBI or the greater of:

  • 50% of your business's W-2 wages, or

  • 25% of W-2 wages plus 2.5% of the UBIA

This rule encourages businesses to pay wages and invest in capital assets, which means your payroll setup and asset tracking must be accurate and thorough. Full-service payroll solutions, such as those offered by 1-800Accountant, ensure your business meets these requirements while remaining compliant.

REIT/PTP and QBI calculation

If you have qualified REIT dividends or income from publicly traded partnerships, you can also claim a 20% deduction on that portion.

These are calculated separately and are not subject to the same wage and property limits. This tends to make calculations more straightforward for eligible income. 

QBI deduction carryforward

If your business has a net qualified business loss in a given tax year, you can’t claim the QBI deduction that year. Instead, the loss is carried forward and reduces your QBI in future years. Keep good records—you’ll need them to calculate the carryforward correctly.

Report QBI Deduction Using the Right Form

To claim the QBI deduction, you’ll use:

• IRS Form 8995, Qualified Business Income Deduction Simplified Computation if your taxable income is below the threshold

• IRS Form 8995-A, Qualified Business Income Deduction if you’re above the threshold or aggregating businesses

You’ll attach the relevant form to your individual tax return, IRS Form 1040, U.S. Individual Income Tax Return, and submit it to the IRS. 

Navigating Special QBI Scenarios and Business Types

Some businesses face unique challenges—and opportunities—when claiming the QBI deduction. Here’s how specialized cases like SSTBs, rental real estate, and multi-entity ownership affect your eligibility and strategy.

Specified Service Trades or Businesses (SSTBs)

Businesses in many fields are considered SSTBs, including: 

• Law

• Accounting

• Consulting

• Health

• Financial services

If you’re in an SSTB and your income exceeds the upper threshold, you may not be eligible for the QBI deduction at all. If you’re near the limit, expert CPA guidance can help you understand your business's limitations and explore compliant strategies..

Real estate enterprises and the QBI deduction

Rental real estate can qualify if it’s treated as a business. The IRS offers a safe harbor if you:

• Keep separate books for each enterprise

• Perform at least 250 hours of rental services per year

• Maintain records of activities and time

Even if you don’t meet the safe harbor, you may still qualify—but documentation is everything. This is an area where full-service bookkeeping solutions, such as those offered by 1-800Accountant, can offer significant value. 

Aggregation election: Combining businesses for QBI purposes

You may be wondering about the purposes of the QBI deduction when combining businesses.

If you own multiple related businesses, you may be able to combine them for QBI purposes. This can help maximize your deduction by pooling W-2 wages and UBIA across entities.

Aggregation must meet strict IRS criteria, and it’s best done with professional support, providing a strategic advantage while ensuring ongoing compliance. 

Strategic Tax Planning to Maximize Your QBI Deduction

To get the most out of your QBI deduction, it pays to be proactive. These strategies can help you: 

• Optimize eligibility

• Maximize savings

• Avoid leaving money on the table

Managing taxable income to stay within favorable thresholds

If you’re close to the income thresholds, strategies like deferring income or accelerating deductions can help you stay eligible. Year-round tax advisory services from your CPA or tax team can help you determine the optimal timing for business expenses or leverage retirement contributions.

Optimizing W-2 wages and UBIA investments

If you’re subject to the wage limit, paying reasonable W-2 wages to yourself or others can boost your deduction. This makes entity structure selection a vital part of QBI tax planning.

Exploring the potential restructuring of your entity, along with other steps informed by professional advice, can be beneficial in these scenarios. 

Impact of entity structure on QBI

Sole proprietors, partnerships, and S corps can all qualify—but the rules differ. For example, S corp owners must take a reasonable salary, which is excluded from QBI, while draws are not. Choosing the right structure (or changing it) can improve eligibility.

Professional services offering personalized guidance on business formation can help establish a structure optimized for tax efficiency, including the QBI deduction, from the outset. These services provide advice on other considerations, such as separating SSTB and non-SSTB activities.

Accurate records and bookkeeping

Accurate bookkeeping is essential for proving QBI, tracking wages, and calculating deductions.

Regular, robust bookkeeping practices are foundational. Full-service bookkeeping ensures financial data is accurate and readily available for QBI substantiation.

Navigating IRS scrutiny and mitigating audit risks

While the QBI deduction is popular among business owners, its complex nature can attract additional IRS scrutiny.

This makes thorough documentation and a clear understanding of the rules governing the QBI deduction crucial, especially in the event the IRS requests additional information or sends an audit notice. Comprehensive audit defense services can provide peace of mind and expert guidance in the event of a QBI-related audit.

Common QBI Deduction Mistakes and How to Prevent Them

Even minor missteps can lead to missed deductions or IRS red flags. Here are some of the most common QBI-related mistakes—and how to steer clear of them:

• Misclassifying income (e.g., including capital gains or wages)

• Underpaying reasonable salary for S corp owners

• Incorrect SSTB identification

• Errors in W-2 wage or UBIA calculations

• Improper business aggregation

These mistakes can reduce your deduction or trigger IRS scrutiny. A professional tax team can help identify and correct them, ensuring your business stays compliant.

The Approaching 2025 QBI Sunset: Implications for Businesses

The QBI deduction is scheduled to expire on December 31, 2025. If this sunset commences as expected, it could increase effective tax rates for pass-through business entities by nearly 10%, a substantial tax increase. While the potential increase in your business tax burden may seem grim, there is a possibility that the QBI deduction will be expanded past 2025.

As of this writing, Congress is currently considering the One Big Beautiful Bill Act, which would not only continue the QBI deduction's availability to pass-through entities but also increase the percentage from 20% to 23%. It's essential to stay informed through reliable sources and professional advisors about legislative developments that could affect your QBI benefits.

Until questions surrounding the QBI deduction, standard deduction, and other tax deductions are answered, your business needs to factor this uncertainty into your long-term tax planning, potentially with guidance from tax advisors.

Maximize Your QBI Deduction Potential with Expert Help

The QBI deduction is one of the most valuable tax benefits for small business owners today. But it’s also one of the most complex. Whether you’re just starting to explore your eligibility or trying to optimize an existing strategy, expert insights can make all the difference.

A strategic approach, guided by professionals, can help your business not only comply but also maximize eligible deductions and align QBI planning with overall financial goals. There are numerous benefits to embracing year-round tax support from dedicated CPAs and tax advisors. They provide ongoing, proactive, industry- and state-specific QBI planning and adjustments as business or tax laws change.

1-800Accountant, America's leading virtual accounting firm, matches your business with CPAs, EAs, tax planners, and bookkeeping professionals experienced in your state and industry. Our team specializes in helping small businesses navigate investment management, the self-employment tax, shareholder gross income, partnership income, and deductions like QBI with confidence. Schedule a free consultation today–usually 30 minutes or less– to see how we can help you make the most of this opportunity.