The 20% QBI Deduction: How Pass-Through Business Owners Save Thousands

If you own a pass-through business — a sole proprietorship, partnership, S-Corp, or LLC taxed as any of the above — the Qualified Business Income (QBI) deduction is likely the single largest deduction on your tax return. It is worth up to 20% of your business income, and for many owners, it saves tens of thousands of dollars annually. But the rules are nuanced, and not everyone qualifies for the full 20%.

What Is the QBI Deduction?

The QBI deduction, also known as the Section 199A deduction, was introduced in the 2017 Tax Cuts and Jobs Act. It allows eligible taxpayers to deduct up to 20% of their qualified business income from a domestic business operated as a pass-through entity. The deduction is taken "below the line" — meaning it reduces your taxable income but not your adjusted gross income. It is available through at least 2026 under current law.

What Counts as Qualified Business Income?

QBI is the net amount of qualified items of income, gain, deduction, and loss from any qualified trade or business. In plain English: it is your business's net profit. It does not include:

• W-2 wages you pay yourself as an S-Corp owner (those are not QBI)
• Investment income like capital gains, dividends, or interest
• Guaranteed payments to partners
• Income earned outside the United States
• Reasonable compensation paid to S-Corp shareholder-employees

Who Qualifies for the Full 20%?

If your total taxable income is below the threshold, you get the full 20% deduction automatically — no matter what business you are in. For 2025, the thresholds are:

• Single filers: $197,900 (full deduction), phase-out through $247,900
• Married filing jointly: $395,800 (full deduction), phase-out through $445,800

If your income is below these thresholds, the deduction is straightforward: 20% of your QBI, capped at 20% of your taxable income minus net capital gains.

The Specified Service Trade or Business (SSTB) Trap

Above the income thresholds, the rules get more complex — especially if your business is a "Specified Service Trade or Business." SSTBs include:

• Health, law, accounting, and consulting services
• Financial services, brokerage, and investment management
• Athletics and performing arts
• Any business where the principal asset is the reputation or skill of one or more employees or owners

The W-2 Wages and Qualified Property Limitation

For non-SSTB businesses above the income thresholds, the QBI deduction is limited to the greater of:

1. 150% of W-2 wages paid by the business, or
2. 225% of W-2 wages plus 2.5% of the unadjusted basis of qualified depreciable property

This is why S-Corps with employees often fare better than solo practitioners at high income levels. If your business has significant payroll and equipment, you can still capture a meaningful QBI deduction even at high income levels.

Strategies to Maximize Your QBI Deduction

1. Keep Income Below the Threshold

If you are near the threshold, accelerating deductions (retirement contributions, equipment purchases, prepaying expenses) can push you below the phase-out range and unlock the full 20%.

2. Separate SSTB from Non-SSTB Activities

If you run both consulting (SSTB) and a non-consulting business, operating them in separate entities can help preserve the QBI deduction on the non-SSTB income. The IRS scrutinizes this, so the separation must be genuine with legitimate business purpose.

3. Increase W-2 Wages Strategically

For S-Corps above the threshold, increasing shareholder wages can actually increase the QBI deduction because of the 50% W-2 wage limitation. This is counterintuitive — normally we want to minimize salary to reduce payroll tax — but in some cases, a modest salary increase can unlock a larger QBI deduction that more than offsets the additional payroll tax.

4. Invest in Qualified Property

The 2.5% of qualified property basis prong of the limitation means that real estate, equipment, and vehicles can increase your allowable QBI deduction. For capital-intensive businesses, this is a significant advantage over service businesses.

How QBI Interacts with Other Strategies

The QBI deduction is calculated after business deductions but before many itemized deductions. This means maximizing your business deductions first (home office, mileage, retirement contributions, equipment) increases your QBI base and then gets multiplied by 20%. It stacks with the Augusta Rule, S-Corp distributions, and retirement contributions — making it a cornerstone of any multi-strategy tax plan.

What Happens in 2026?

Under current law, the QBI deduction expires after December 31, 2025, unless Congress extends it. If it expires, pass-through business owners will face a significant tax increase. Many tax professionals are advising clients to accelerate income into 2025 (if the deduction is still available) or to plan for higher rates starting in 2026. Monitor legislative developments closely — this is one of the most impactful provisions in the tax code.

The QBI deduction is not a bonus — it is a structural feature of the tax code that rewards business ownership. Business owners who plan around it, rather than simply accepting whatever their software calculates, consistently keep more of what they earn.

Tiffany Nellums, Tax Principal