Qualified Business Income (QBI) Deduction
A deduction of up to 20% of qualified business income from pass-through entities like sole proprietorships, partnerships, and S corporations, available under Section 199A.
The Qualified Business Income deduction, also known as the Section 199A deduction, allows eligible self-employed individuals and owners of pass-through entities to deduct up to 20% of their qualified business income. This effectively lowers the tax rate on business income by one-fifth.
The deduction is available to sole proprietors, partners, S corporation shareholders, and some trust and estate beneficiaries. For 2025, the full deduction is available without limitation for single filers with taxable income below $197,300 ($394,600 for married filing jointly). Above those thresholds, the deduction may be limited based on W-2 wages paid by the business or the unadjusted basis of qualified property.
Certain specified service trades or businesses (SSTBs) — including health, law, consulting, athletics, and financial services — face additional restrictions. If your income exceeds the phase-out range, SSTB income is completely excluded from QBI. The QBI deduction is taken on line 13 of Form 1040 and reduces taxable income but not AGI.
How it works
The QBI deduction, created by Section 199A, lets eligible pass-through business owners deduct up to 20% of their qualified business income directly from their taxable income, effectively taxing that slice of business profit at four-fifths of the rate it would otherwise face. It applies to sole proprietors, partners, S corporation shareholders, and certain trust and estate beneficiaries, but not to income already taxed at the corporate level through a C corporation.
You calculate QBI on the applicable IRS worksheet or Form 8995 (simplified) or Form 8995-A (for taxpayers above the income threshold), and the resulting deduction lands on line 13 of Form 1040 — it reduces your taxable income but not your AGI, so it does not help you qualify for AGI-based credits or deductions elsewhere on your return. Below the 2025 taxable income thresholds of $197,300 (single) and $394,600 (MFJ), the full 20% deduction applies with no further limitation.
Above those thresholds, the deduction can be limited based on W-2 wages the business pays or the unadjusted basis of qualified property it owns — a wage-and-capital test meant to prevent high earners from converting wage income into artificially discounted business income. Specified service trades or businesses, including health, law, consulting, athletics, and financial services, face an additional restriction: once income clears the phase-out range entirely, SSTB income is excluded from QBI altogether, while non-SSTB businesses only face the wage-and-capital limitation, not full exclusion.
Example: QBI deduction below the income threshold
A sole proprietor consultant reports $150,000 of qualified business income on Schedule C for the year, and their taxable income is well under the $197,300 single-filer threshold, so the wage-and-capital limitation and the SSTB exclusion do not apply.
Twenty percent of $150,000 is $30,000, which is the QBI deduction taken on line 13 of Form 1040. That $30,000 reduces the consultant's taxable income directly — it is not treated as a business expense on Schedule C, so it does not reduce self-employment tax.
Frequently asked questions
Who qualifies for the QBI deduction?
Does the QBI deduction reduce self-employment tax?
Why did my QBI deduction get limited even though I'm not an SSTB?
Related Terms
Sole Proprietor
An individual who owns and operates an unincorporated business by themselves. Business income and expenses are reported on Schedule C of the personal tax return.
Schedule C
The IRS form (Schedule C of Form 1040) used by sole proprietors and single-member LLCs to report business income and expenses. The net profit flows to your personal tax return.
Taxable Income
The portion of your income that is actually subject to federal income tax, calculated by subtracting the standard or itemized deduction from your AGI.
Self-Employment Tax
The combined Social Security (12.4%) and Medicare (2.9%) tax paid by self-employed individuals — effectively both the employee and employer shares of FICA, totaling 15.3%.