qualified business income (QBI)

The qualified business income (QBI) deduction is a tax concept that allows many small business owners to deduct up to 20% of their business profits directly from their federal taxable income. The deduction—often called the 199A deduction—was originally created under the Tax Cuts and Jobs Act of 2017. The deduction was made permanent under the 2025 One Big Beautiful Bill Act (OBBBA).

What counts as QBI

QBI generally includes the ordinary income your business generates after expenses, including unreimbursed partnership expenses, business interest expense, self-employment health insurance deduction, contributions to qualified retirement plans, and the deductible portion of self-employment tax. It applies to income from sole proprietorships, partnerships, LLCs treated as partnerships, and S corporations—the same business types whose income “passes through” to their owners’ Form 1040. If you’re a sole proprietor who runs income and expenses through Schedule C, reports partnership income on a Form K-1, or owns shares in an S corporation, your share of profits may qualify.

QBI does not include wage income such as on a W-2, capital gains, dividends, interest not related to the business, commodities transactions, or income from C corporations. It also excludes reasonable compensation paid to S corporation shareholders and guaranteed payments to partners.

Who can claim the deduction

The QBI deduction is available only to taxpayers with qualified pass-through income, which is why C corporations and their shareholders do not qualify. The deduction is phased out at the income ranges noted below. Income levels in the phaseout range require use of Form 8995A to calculate the QBI deduction; most other businesses may use Form 8995.

“Specified service trades or businesses,” or “SSTBs” include professionals in law, accounting, consulting, medicine, performing arts, athletics and financial services. These businesses may take a full QBI deduction if their incomes are below the thresholds, but require completion of a special Schedule A of Form 8995A to calculate their phaseout.

How the QBI deduction (QBID) works

The deduction is calculated using Form 8995 (or Form 8995-A for more complex situations, or if your income is in the phaseout range). In the most common scenario, the math is straightforward:

• Take your qualified business income.
• Deduct up to 20% of that amount.

There is one important guardrail: The deduction cannot exceed 20% of taxable income minus net capital gains. In other words, even if your QBI is large, your overall taxable income sets the ceiling.

Because the deduction is taken at the owner level, not the business level, each owner (e.g., each partner in a partnership) calculates their own deduction separately on their individual tax return.

Why the QBID matters

The QBI deduction effectively lowers the tax rate on eligible business income. For example, if you’re a sole proprietor with $100,000 in qualified business income, you may be able to deduct up to $20,000 from your taxable income, reducing the amount subject to federal income tax. For many small business owners, this deduction provides meaningful tax relief without requiring a change to the business structure.

What business owners should keep in mind

• Your entity type matters. Only pass-through structures—sole proprietorships, partnerships, LLCs, and S corps—qualify.
• State rules may differ. Some states conform to federal QBI rules, while others do not.
• Compensation rules apply. S corp owners must pay themselves reasonable wages, and those wages do not count as QBI.
• It can get complicated. Because income thresholds, phaseouts, and multi-owner allocations can be complex, many businesses lean on tax professionals or tax software to confirm eligibility.

The QBI deduction remains a valuable benefit for millions of U.S. business owners. Understanding whether your business structure qualifies—and how the deduction fits into your broader tax picture—can help you keep more of what your business earns.