The QBI Deduction Explained: A 20% Tax Break for Business Owners

The Qualified Business Income (QBI) deduction, also called the Section 199A deduction, is one of the most valuable tax breaks for small business owners. It was originally set to expire after 2025, but the 2025 tax law made it permanent.

What is it?

The QBI deduction lets eligible owners of pass-through businesses deduct up to 20% of their qualified business income on their personal tax return.

Pass-through businesses include:

• Sole proprietorships
• Single- and multi-member LLCs
• Partnerships
• S corporations

C corporations don't qualify.

How it works

If your sole proprietorship has $80,000 of qualified business income, the QBI deduction could be up to $16,000, reducing your taxable income. The deduction reduces income tax only, not self-employment tax.

It's also limited to 20% of your taxable income (before the QBI deduction, minus net capital gains), so it can be smaller than 20% of business income.

What counts as qualified business income?

QBI is generally the net profit from your business. It does not include:

• An S-corp owner's W-2 salary
• Guaranteed payments to partners
• Investment income like interest, dividends and capital gains

The income limits

For taxpayers with taxable income below certain thresholds (which adjust each year), the calculation is straightforward: generally 20% of QBI.

Above those thresholds, extra rules apply:

• Specified service trades or businesses (SSTBs), such as health, law, accounting, consulting, financial services and performing arts, see the deduction phase out and eventually disappear at higher incomes
• Wage and property limits may cap the deduction for non-service businesses

The 2025 law expanded the phase-in range, so the deduction phases out more gradually than before.

New minimum deduction

Starting in 2026, the law adds a minimum QBI deduction of $400 for taxpayers who have at least $1,000 of QBI from active businesses they materially participate in.

How the QBI deduction affects other decisions

• S-corp salary: A higher salary lowers QBI. Setting a reasonable, defensible salary matters for both payroll tax and QBI.
• Equipment purchases: Large depreciation deductions reduce QBI.
• Retirement contributions: Self-employed retirement contributions can reduce QBI.

Do I have to do anything to claim it?

There's no separate election. Your tax preparer calculates it using Form 8995 or 8995-A. What you need is accurate books, because the deduction is based on your actual business profit.

The bottom line

The QBI deduction can reduce the taxable income of many pass-through business owners by up to 20%, and it's now permanent. Clean bookkeeping and coordinated planning around salary, equipment and retirement contributions help you get the most from it.

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Need help getting this right? TRIG Bookkeeping & Tax Services helps new business owners in Washington with company registration, monthly and annual bookkeeping, and government compliance. Contact us to talk about your business.

This article is general information, not legal or tax advice for your situation. Tax rules and fees change, so confirm current details with the IRS, the Washington Department of Revenue, or a qualified professional.