Do I Qualify for the Federal Qualified Business Income (QBI) Deduction?
The Qualified Business Income (QBI) deduction, established under Section 199A of the Internal Revenue Code, allows eligible taxpayers to deduct up to 20% of their qualified business income from pass-through entities such as sole proprietorships, partnerships, S corporations, and certain trusts and estates. To determine if you qualify, several key factors must be considered.
Eligible Business Types
Your business must be a qualified trade or business. Generally, this includes any activity conducted for profit with continuity and regularity, as defined under Section 162. However, certain businesses are excluded:
- Specified Service Trades or Businesses (SSTBs): These include fields such as health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, investing, trading, and businesses where the principal asset is the reputation or skill of an owner or employee.
- Corporate-owned businesses: C corporations are not eligible for the QBI deduction; however, income from S corporations may qualify because they are pass-through entities.
Employee services: Income earned as an employee is not considered QBI
Income Thresholds and Phase-In Rules
The QBI deduction is subject to income limits. For 2025:
- Married filing jointly: If taxable income before the QBI deduction is $394,600 or less, your SSTB is treated as a qualified trade or business. If income exceeds $394,600 but is $494,600 or less, a partial deduction may apply.
- All other filing statuses: If taxable income before the QBI deduction is $197,300 or less, your SSTB qualifies. If income exceeds $197,300 but is $247,300 or less, a partial deduction may apply.
De Minimis Rules for SSTBs
Even if your business falls into an SSTB category, you may still qualify for the QBI deduction if:
- Gross receipts are $25 million or less and less than 10% of receipts come from specified services.
- Gross receipts exceed $25 million and less than 5% of receipts come from specified services.
- These rules apply when a business has both SSTB and non-SSTB activities.
What Counts as Qualified Business Income (QBI)?
QBI includes items of income, gain, deduction, and loss from your trade or business that are allowed in calculating taxable income. This generally includes:
- Ordinary business income or loss (if used in computing taxable income).
- Unreimbursed partnership expenses.
- Deductible part of self-employment tax.
- Self-employment health insurance deduction.
- Contributions to qualified retirement plans.
QBI does NOT include:
- Wage income (except statutory employees).
- Guaranteed payments to partners.
- Capital gains or losses.
- Dividends or interest not allocable to a trade or business.
- Commodities or foreign currency gains/losses.
How to Calculate Your QBI Deduction
The QBI deduction is generally the lesser of:
- 20% of your QBI plus any qualified REIT or PTP income (REIT/PTP component).
- 20% of your taxable income (before the QBI deduction), minus net capital gain and qualified dividends.
If your business is an SSTB and your income exceeds the threshold, the deduction may be further limited based on W-2 wages paid and the Unadjusted Basis Immediately After Acquisition (UBIA) of qualified property.
Reporting Requirements
You must use Form 8995 (Qualified Business Income Deduction Simplified Computation) or Form 8995-A (Qualified Business Income Deduction) to calculate your QBI deduction. If you have an SSTB with income in the phase-in range, you must complete Schedule A (Form 8995-A) to determine the applicable percentage of your SSTB that qualifies for the deduction.
Source:
Form 8995
Form 8995-A
Schedule K-1 (1120-S)
Disclaimer: Always verify with current Federal or State Department of Revenue Forms and Instructions for the most accurate and up-to-date information.