Make the Most of the Qualified Business Income Deduction

The qualified business income (QBI) deduction, introduced in 2018, remains one of the most valuable tax benefits available to many business owners. It allows eligible taxpayers to deduct up to 20% of their qualified business income, not to exceed 20% of taxable income. In addition, the deduction can apply to up to 20% of qualified real estate investment trust (REIT) dividends.

Understanding the QBI Deduction

QBI generally refers to the net amount of qualified income, gain, deduction, and loss from a qualified U.S. trade or business. Those eligible for the deduction include sole proprietors and owners of pass-through entities such as partnerships, S corporations, and limited liability companies (LLCs) that are taxed as sole proprietorships, partnerships, or S corporations. C corporations are not eligible for the deduction.

Additional limits on the deduction may apply when taxable income exceeds certain thresholds. For 2025, these thresholds are $197,300 for single filers and $394,600 for married couples filing jointly. Once income exceeds these limits, the deduction begins to phase out, and the following limitations may apply:

• Wage limit: The deduction may be capped at 50% of the W-2 wages paid to employees by the qualified business during the year.

• Wage and property limit: Alternatively, it may be limited to the sum of 25% of W-2 wages plus 2.5% of the unadjusted basis (before depreciation) of qualified property. Qualified property generally includes tangible, depreciable property—such as real estate—owned by the business and used to generate QBI.

If the QBI comes from a specified service trade or business (SSTB)—for example, those in law, health, consulting, performing arts, or athletics—the deduction may be reduced or eliminated once income exceeds the phaseout thresholds. Notably, engineering and architecture businesses are excluded from this rule.

Planning Ahead

The QBI deduction can provide significant tax savings, but the calculation and limitations can be complex. Changes in income, wages, or business structure may impact the amount you can claim. Strategic planning can help ensure you receive the maximum benefit available.

If you haven’t reviewed your eligibility or optimization strategies recently, now may be a good time to do so. Contact us to discuss how the QBI deduction applies to your situation and ways to make the most of this valuable tax break.