What Is the QBI Deduction? (The 20% Pass-Through Deduction Explained)

What it is

If you own a pass-through business — sole prop, LLC, partnership, or S-corp — you might be entitled to deduct up to 20% of your business profit from your taxable income. This is the Qualified Business Income (QBI) deduction, created by Section 199A of the tax code.

It doesn’t reduce self-employment tax. It doesn’t show up on your Schedule C. It comes off your taxable income after all your business income and deductions are calculated — on the personal return side. Think of it as a bonus deduction that roughly levels the playing field between C-corps (which have a flat 21% corporate rate) and pass-through owners.

The basic math

If your qualified business income is $100,000 and you qualify for the full deduction, you deduct $20,000 from your taxable income. At a 22% marginal rate, that saves $4,400 in income tax. At 32%, it saves $6,400.

The deduction is capped at 20% of your QBI or 20% of your total taxable income (before the deduction), whichever is lower. Most business owners don’t hit this cap in practice.

The service business complication

If your business is a Specified Service Trade or Business (SSTB), the rules get tighter. SSTBs include:

• Consulting
• Law
• Accounting and financial services
• Health (physicians, therapists, etc.)
• Performing arts and athletics
• Brokerage services

SSTB owners still get the full deduction if their taxable income is below the phase-out threshold. But as income rises above that threshold, the deduction phases out and eventually disappears entirely.

The phase-out ranges in recent years have been approximately:

• Single filers: Phase-out begins around $182,500 and is gone by $232,500
• Married filing jointly: Phase-out begins around $364,200 and is gone by $464,200

These thresholds are adjusted for inflation each year. Below the bottom of the phase-out range, SSTB owners get the full 20% deduction. Above the top, they get nothing.

Non-service businesses have W-2 wage limits

For businesses above the same income thresholds that are not SSTBs, the deduction is limited by the higher of:

• 50% of total W-2 wages paid by the business, or
• 25% of W-2 wages plus 2.5% of the unadjusted basis of qualified property

In plain terms: if you’re a high-income, non-service business owner with no W-2 employees (or if you’re an S-corp owner with a low salary), your deduction could be limited. This is another reason why S-corp salary decisions have real downstream consequences — your W-2 wages affect your QBI deduction cap.

How it shows up on your return

The QBI deduction is calculated on Form 8995 (simple version) or Form 8995-A (complex version for higher incomes). It then flows to Line 13 of Schedule A — wait, no. It goes on line 13 of Form 1040 and reduces your taxable income directly. It’s a deduction you take even if you don’t itemize.

If you’re using a CPA or decent tax software, this should be calculated automatically. The main thing you need to do is make sure your business income is properly categorized as pass-through income and not, for example, treated as W-2 wages.

The three things that actually matter here

1. Check your income against the phase-out thresholds.If you’re below them, you likely get the full deduction and don’t need to think harder about it. If you’re above them, there’s planning to do.
2. If you have an S-corp, your salary affects your QBI.Every dollar you take as W-2 salary is a dollar that’s NOT eligible for the 20% deduction. Your CPA should be modeling the salary vs. distribution split with QBI in mind.
3. Don’t pay extra to claim it.The deduction should be automatic on any properly prepared return. If your CPA isn’t claiming it and you think you qualify, ask them about Form 8995.