1. QBI Overview
The Qualified Business Income deduction allows eligible self-employed individuals to deduct up to 20% of qualified business income from their taxes. The 2025 federal tax law made this deduction permanent. It applies to income from sole proprietorships, single-member LLCs, partnerships, and S corporations. Beginning in 2026, there is also a minimum QBI deduction of up to $400 for eligible taxpayers with qualified business income, even if the regular 20% computation produces a smaller amount.
2. Eligibility Requirements
Your total taxable income must be below specified thresholds to claim the full deduction. For 2025, the phase-out begins at $197,300 for single filers and $394,200 for joint filers (verify the current-year amounts on irs.gov). Below these amounts, you generally qualify for the full 20% deduction regardless of business type.
3. What Is QBI?
QBI is the net income from your trade or business, effectively the net profit from Schedule C. Certain items are excluded: guaranteed payments to partners, capital gains and losses, dividends, interest income, and wages earned as an employee. Reasonable compensation paid to yourself as an S corporation owner is not QBI.
4. Limitations Above Thresholds
Above the income thresholds, limitations apply based on your type of business. Specified service trades or businesses (SSTBs)—including health, law, accounting, consulting, and performing arts—see the deduction phase out completely. Other businesses face limits based on W-2 wages paid and unadjusted basis of qualified property.
5. Calculating the Deduction
The deduction is the lesser of: (1) 20% of QBI, or (2) 50% of W-2 wages paid, plus 25% of W-2 wages plus 2.5% of unadjusted basis of qualified property. The deduction cannot exceed 20% of taxable income minus net capital gains.
6. Where to Claim
The QBI deduction is claimed on Form 8995 (or Form 8995-A if required) and flows to Form 1040 Schedule 1, Line 13. It is an above-the-line deduction that reduces adjusted gross income.