Understanding the Qualified Business Income Deduction for Small Business Owners

For any small business owner or self-employed professional, the Qualified Business Income (QBI) deduction is undeniably one of the most significant tax breaks available. It can reduce taxable income and lower your overall tax bill substantially. However, despite its potential, many taxpayers either overlook this deduction or fail to maximize its benefits due to misunderstanding or misinformation.

This guide breaks down the QBI deduction in plain English—no accounting degree required—so you can make informed decisions and potentially save thousands on your taxes.

What Is the Qualified Business Income Deduction?

The QBI deduction, also known as Section 199A, was introduced under the Tax Cuts and Jobs Act of 2017. This provision allows eligible owners of pass-through entities—including sole proprietors, partnerships, S corporations, and some LLCs—to deduct up to 20% of their qualified business income from their taxable income.

For example, if your business earns $100,000 in qualified income, you may be eligible for a $20,000 deduction. That’s $20,000 of income the IRS doesn’t tax.

In addition to the 20% deduction from business income, Section 199A also includes potential deductions on qualified REIT dividends and qualified publicly traded partnership (PTP) income.

Who Qualifies for the QBI Deduction?

Eligibility for the QBI deduction depends on several factors. Understanding whether you qualify is the first step in claiming the deduction:

1. Type of Business

To be eligible, your business must be structured as a pass-through entity. These include:

• Sole proprietorships

• Partnerships

• S Corporations

• Some trusts and estates

• Limited Liability Companies (LLCs) taxed as any of the above

2. Type of Income

Only income from a qualified trade or business qualifies. This includes:

• Income from actively operating a business (not passive)

• Excludes investment income, such as:

  • Capital gains or losses

  • Dividends

  • Interest income (with some exceptions)

  • Income earned outside the U.S.

3. Income Level

Your taxable income determines how much of the QBI deduction you can claim. For 2025 (estimated, adjusted for inflation), the thresholds are:

• Single filers: up to $191,000

• Married filing jointly: up to $382,000

If your income is below these thresholds, you can typically claim the full 20% deduction without restrictions.

If you’re above these limits, the IRS applies complex rules, particularly for owners in Specified Service Trades or Businesses (SSTBs).

What Is a Specified Service Trade or Business (SSTB)?

SSTBs are businesses where the principal asset is the reputation or skill of one or more of its owners or employees. Examples include:

• Accountants

• Attorneys

• Doctors and healthcare professionals

• Consultants

• Financial advisors and planners

• Performing artists and athletes

If your business is considered an SSTB and your income exceeds the threshold, your QBI deduction phases out over a $50,000 range (single) or $100,000 (married filing jointly), eventually becoming unavailable.

Non-SSTBs face fewer restrictions and may still qualify for the deduction even at higher income levels, provided they meet the W-2 wages and qualified property tests.

How to Maximize the QBI Deduction

Strategic tax planning can help business owners optimize the QBI deduction—even if they approach or exceed the income thresholds. Here’s how:

✅ Lower Your Taxable Income

Reducing your adjusted gross income (AGI) can help retain eligibility for the full deduction.

• Maximize contributions to retirement accounts (e.g., SEP IRA, 401(k), SIMPLE IRA)

• Make charitable donations

• Use Section 179 or bonus depreciation to deduct qualified business assets

• Track and claim all legitimate business expenses

✅ Pay Yourself Strategically

• For S corporation owners, ensure you pay yourself a reasonable salary via W-2. This helps you meet the wage requirements for QBI.

• Optimize the balance between W-2 wages and distributions to maximize deductions without triggering excess payroll taxes.

✅ Consider Changing Your Business Structure

Sometimes, restructuring your entity type (e.g., from a sole proprietorship to an S Corp) can help you:

• Save on self-employment taxes

• Make more income eligible for QBI deduction

• Comply more easily with the IRS’s wage/property tests

✅ Aggregate Related Businesses

If you own multiple businesses, you may be allowed to aggregate them for QBI purposes if:

• They share common ownership (50% or more)

• They provide similar or interdependent products/services

• Aggregation helps meet W-2 wage and property requirements for high-income filers

✅ Employ Family Members

Hiring lower-income family members can shift income into a lower tax bracket, which may:

• Reduce your total taxable income

• Keep your QBI deduction intact

• Allow legitimate wages to be deducted by your business

✅ Invest in Qualified Business Property

The QBI deduction may also be calculated using the value of certain business assets, particularly for high-income earners who don’t meet the wage test. Investing in:

• New equipment

• Real estate

• Other depreciable assets
  can potentially boost your deduction.

⚠️ Note: These strategies can be complex and must be implemented carefully to remain compliant with IRS rules. Poor documentation or planning may invalidate your deduction.

Common Mistakes to Avoid

• Not claiming QBI at all (Many self-employed individuals miss this!)

• Mismatching business type and tax treatment

• Failing to separate business vs. investment income

• Under- or overpaying yourself as an S Corp owner

• Ignoring SSTB classification risks

Final Thoughts

The Qualified Business Income (QBI) deduction offers a powerful way for small business owners and self-employed professionals to significantly lower their tax liability. However, with rules around income thresholds, SSTBs, and business structures, navigating the deduction can quickly become complicated.

Understanding your eligibility, income limits, and planning options is key to unlocking the full benefit. Don’t leave money on the table due to oversight or confusion.

Need Expert Help?

At KB Tax Devisers, we specialize in helping entrepreneurs, professionals, and business owners decode the complexities of tax law, including Section 199A and the QBI deduction. Whether you need year-round planning, restructuring advice, or help optimizing your deductions, our experts are here for you.

📞 Contact us today to schedule a consultation—and find out how much you could be saving.