Qualified Business Income (QBI) Deduction
Authority: IRC §199A
The QBI deduction under Section 199A allows owners of pass-through businesses (sole proprietorships, partnerships, S corporations, and many rentals) to deduct up to 20% of their qualified business income on their personal returns, on top of normal business deductions. Originally scheduled to expire after 2025, the deduction was made permanent by the 2025 tax legislation. Below a taxable income threshold (indexed annually), the deduction is generally the full 20%. Above the threshold, two limits phase in: specified service businesses (law, health, consulting, financial services, and similar) can lose the deduction entirely, and other businesses become subject to a cap based on W-2 wages paid and the unadjusted basis of depreciable property. QBI excludes capital gains, most investment income, reasonable compensation paid to S corporation owners, and guaranteed payments.
Example
An S corporation owner has $200,000 of qualified business income flow through on her K-1 and is under the income threshold. Her QBI deduction is $40,000, which at a 32% marginal rate saves $12,800 of federal tax without spending a dollar.
Related terms
S Corporation
An S corporation is a corporation or an LLC that elects corporate treatment that has filed a valid election under...
Reasonable Compensation
Reasonable compensation is the W-2 salary an S corporation must pay a shareholder who works in the business before...
Schedule K-1
Schedule K-1 is the form a pass-through entity issues to each owner reporting that owner's share of the entity's...
Guaranteed Payments
Guaranteed payments are amounts a partnership pays a partner for services or for the use of capital that are...
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