The qualified business income deduction is a federal tax provision that helps some small business owners and self-employed individuals reduce their taxable income. Find out how to qualify and what types of income are eligible for this deduction.
Key Points
• The QBI deduction allows eligible self-employed individuals and pass-through business owners to deduct up to 20% of qualified business income on their federal taxes.
• It applies to pass-through entities such as sole proprietorships, partnerships, S corporations, and some LLCs.
• The deduction is subject to income limits, with additional restrictions for higher earners, especially those in specified service trades or businesses (SSTBs).
• QBI generally includes net income from domestic business operations but excludes wages, investment income, and capital gains.
• The QBI deduction is permanent, as it was signed into law in July 2025.
What Is the Qualified Business Income (QBI) Deduction?
The QBI deduction is a popular small business tax tip that may lower federal taxes for some business owners. It offers a tax break on pass-through income, which includes business earnings that are reported on an individual’s income tax return.
The deduction allows eligible business owners to deduct as much as 20% of their qualified business income, as well as 20% of qualified Real Estate Invest Trust (REIT) dividends and publicly traded partnership income. However, there are restrictions on who qualifies for the deduction and what types of income are eligible.
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How the QBI Deduction Works
The QBI deduction is used on individual tax returns, not business tax returns. Taxpayers who own certain types of businesses can claim the deduction regardless of whether they take the standard deduction or itemize deductions.
The qualified business income deduction doesn’t lower the amount you have to pay in self employment tax, but it does help reduce your taxable individual income.
Who Qualifies for the QBI Deduction?
Eligibility depends on the type of business you own as well as your income. The following business structures qualify for the QBI: sole proprietorships, partnerships, S corporations, some LLCs, and some trusts and estates.
You’re not eligible if you have C corporation income or income earned as an employee.
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Income Limits and Phaseouts
The 20% QBI deduction reduces if your total taxable income exceeds certain thresholds and may eventually phase out completely, depending on your type of business.
Here are the phase-in ranges for 2026 based on tax filing status. Income levels under the lower threshold qualify for the full deduction. Those within the phase-in range could receive a partial deduction.
• $403,500 to $553,500 for taxpayers married filing jointly
• $201,775 to $276,750 for all other taxpayers
For taxpayers who exceed the phase-in limit, your deduction is capped to the larger of the following:
• 50% of W-2 wages paid to employees
• 25% of employee W-2 wages, plus 2.5% of the unadjusted basis of qualified property
Specified Service Trades or Businesses (SSTBs)
If your business is considered an SSTB, you could qualify for a partial deduction if your income exceeds the thresholds above. SSTBs are considered businesses related to the following industries:
• Health
• Law
• Accounting
• Actuarial science
• Performing arts
• Consulting
• Athletics
• Financial services
• Investing and investment management
• Trading or dealing in certain assets
• Business where the principal asset is the reputation or skill of one or more of its employees or owners
What Counts as Qualified Business Income?
QBI includes the net amount of qualified business financials from partnerships, S corporations, sole proprietorships, and certain trusts. It does not include W-2 income, capital gains or losses, dividends, or interest.
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How to Calculate the QBI Deduction
Wondering how much tax your business will pay? Your QBI deduction plays a major part in the answer to this question. Follow these six steps to calculate your potential qualified business income deduction.
• List out your eligible businesses and the qualified income or loss for each one
• Add any business net or loss carryforward from the previous year
• Multiply that number by 0.20 to find 20% of your qualified business income
• Next, tally up any income or loss from REIT dividends and PTPs
• Multiply that number by 0.20 to get 20%
• Add the deduction from your QBI, REIT, and PTP income
The form also helps you calculate your total taxable income to determine if it’s over the limitation. Otherwise, you can claim the total deduction from above on your individual tax return.
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How to Claim the QBI Deduction
The QBI deduction is claimed on your individual income tax return. Most taxpayers will use Form 8995 while those with higher incomes will use Form 8995-A.
Fill out the form with your other tax forms, such as Form 1040 (which reports your individual income) and Schedule C (which reports your business income and expenses).
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Benefits and Drawbacks of the QBI Deduction
Wondering if deducting part of your qualified business income is worth it? Here are the pros and cons to weigh.
Pros of the QBI deduction:
• Potential to provide tax savings: The biggest benefit of the QBI deduction is that it can lower your taxable income. Instead of paying federal taxes on your full business income, you can reduce that line item by as much as 20%.
• Works with the standard deduction: Most deductions require you to itemize your taxes, but even taxpayers who take the standard deduction can qualify for the full qualified business income deduction.
• Keeps other deductions in place: Taking the QBI deduction doesn’t impact your ability to deduct retirement contributions, business expenses, or health insurance premiums (although, as you’ll see in the cons, those contributions can impact your total QBI).
Cons of the QBI deduction:
• Income thresholds are complicated: Your income must fall into certain thresholds in order to qualify for the QBI deduction. High-earning business owners may not be eligible.
• Other deductions could reduce QBI: Any deductible contributions made to a SEP IRA or Solo (401K), as well as health insurance deductions, could lower your qualified business income — and therefore your QBI deduction.
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The Future of the QBI Deduction
The QBI deduction began as a temporary deduction with the passage of the 2017 Tax Cuts and Jobs Act (TCJA). But instead of sunsetting after 2025, it was turned into a permanent part of the tax code with the passage of the One, Big, Beautiful Bill Act (OBBBA).
As mentioned above, the new tax law made some changes to the phase-in ranges. Otherwise, small business owners can continue to claim this deduction on their individual tax returns until any changes to the law are made in the future.
The Takeaway
Taking the QBI deduction can be complicated, but it’s a valuable tax resource for eligible business owners. From paying owed taxes to hiring a tax advisor, a small business loan can help this tax season.
If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.
FAQ
What is the QBI deduction?
The QBI deduction offers up to a 20% deduction on qualified business income for eligible business owners.
Who qualifies for the QBI deduction?
In order to qualify for the QBI deduction, you must have business income from an eligible entity such as a sole proprietorship, partnership, S corporation, or qualifying trust or estate.
How do I calculate the QBI deduction?
Calculate your qualified business income. Then multiply it by 0.20 (20%) to see how much you can deduct from your taxable income.
What is considered qualified business income?
Qualified business income includes net income from an eligible business. It doesn’t include W-2 income, dividends, or interest.
Does the QBI deduction expire?
Not anymore. Previously, the QBI deduction was set to expire after 2025. But it became permanent with the passage of the One, Big, Beautiful Bill in 2025.
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