The Qualified Business Income (QBI) deduction, also known as the Section 199A deduction, allows eligible individual taxpayers, trusts, and estates to deduct up to 20% of their qualified business income (QBI) from pass-through entities such as sole proprietorships, partnerships, S corporations, and certain trusts and estates. This deduction is not available for income from C corporations. Publicly traded partnership (PTP) income is not included in QBI itself, but it is eligible for a separate 20% deduction component.
Eligibility and Calculation
- Qualified Business Income (QBI): Includes net income, gain, deduction, or loss from a trade or business effectively connected with the United States. It excludes items such as wage income, guaranteed payments, capital gains, dividends, interest not allocable to a trade or business, and annuities (unless related to the business).
- Additional Inclusions: The deduction also includes 20% of qualified REIT dividends and 20% of qualified publicly traded partnership (PTP) income, which are calculated separately from QBI.
- Income Limitation: The total QBI deduction is limited to the lesser of:
- 20% of QBI plus 20% of qualified REIT dividends and PTP income, or
- 20% of taxable income (before the QBI deduction) reduced by net capital gain.
Income Thresholds (2025):
- Single filers: Taxable income ≤ $197,300
- Married filing jointly: Taxable income ≤ $394,600
If taxable income exceeds these thresholds, the deduction may be subject to additional limitations. For specified service trades or businesses (SSTBs), the deduction is phased out over the applicable income range and fully disallowed once income exceeds the phase-out range. For non-SSTBs, the deduction is not phased out but may be limited based on W-2 wages paid and the unadjusted basis immediately after acquisition (UBIA) of qualified property.
Forms Used to Calculate the Deduction
- Form 8995: Used if taxable income before the QBI deduction is at or below $197,300 ($394,600 if married filing jointly) and the taxpayer is not a patron of an agricultural or horticultural cooperative.
- Form 8995-A: Used if the taxpayer does not meet the above criteria. This form includes more detailed calculations, including SSTB limitations and W-2 wage/UBIA limitations.
Reporting the Deduction
The QBI deduction is reported on Line 13a of Form 1040 or Form 1040-SR. The amount is calculated on Form 8995 or Form 8995-A and must be attached to the return.
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Disclaimer: Always verify details with the current year’s Federal or State Department of Revenue Forms and Instructions. For complex situations, consult a CPA or tax attorney.