The tax code just locked in one of the largest small business deductions — and the catch is in the details.

The Qualified Business Income (QBI) deduction lets eligible owners of pass-through businesses deduct up to 20% of their qualified business profit right on their personal return. It’s not a business expense and not a tax credit — it’s a direct reduction to taxable income that can cut thousands off the tax bill each year.

Here’s what changed in 2025: under the One Big Beautiful Bill Act (OBBBA), Congress made the QBI deduction permanent and added a new protection for smaller operators — if you have at least $1,000 of qualified business income from a business where you actively participate, you now get a minimum $400 deduction (adjusted for inflation starting in 2026). No more 2025 “sunset” date. No more wondering if this benefit will disappear.

The rules for claiming it still have moving parts: income thresholds, limits for certain service industries, W-2 wage and property tests for higher earners, and quirks that can treat similar businesses very differently.

You’ve built a successful business. Now it’s time to be just as deliberate about keeping more of what it earns.

What the QBI Deduction Actually Means for Your Business

The Qualified Business Income (QBI) deduction, officially called the Section 199A deduction, lets owners of pass-through businesses deduct up to 20% of their qualified business income on their personal tax return. It was created to help level the playing field after corporate tax rates dropped to 21%.

Here’s what that looks like in real numbers: if your business has $200,000 in qualified income, you could deduct $40,000 from taxable income. At a 32% marginal rate, that’s about $12,800 in federal tax savings.

The deduction is available whether you itemize or take the standard deduction — it’s a separate “below-the-line” deduction that lowers taxable income and, in some cases, can help you qualify for other tax benefits.

New for 2025: if you have at least $1,000 of qualified business income from a business in which you actively participate, you now get a minimum $400 QBI deduction (per taxpayer, not per business), even if your income or business profile would otherwise reduce it.

What hasn’t changed: the core 20% formula, the Specified Service Trade or Business (SSTB) restrictions, and the taxable income limits are all still in place — the new law simply makes the deduction permanent and adds the small-business minimum.

Does Your Business Qualify?

The QBI deduction is designed for owners of pass-through entities — businesses where profits “pass through” to your personal tax return and are taxed at individual rates instead of a corporate rate.

Business structures that generally qualify:

• Sole proprietorships, including single-member LLCs taxed as sole proprietors

• Partnerships, including multi-member LLCs taxed as partnerships

• S corporations (where profits pass through to shareholders)

• Some trusts and estates with qualifying business income

Rental real estate can qualify if it rises to the level of a trade or business under IRS rules. The IRS also offers a safe harbor in Revenue Procedure 2019-38: if you perform at least 250 hours of rental services per year, maintain separate books and records, and meet other requirements, the activity can be treated as a trade or business for QBI purposes.

Does not qualify:

• C corporations (their profits are taxed at the entity level)

• W-2 wages from your own S corporation (though those wages can help with the W-2 wage limitation)

• Investment income like capital gains, dividends, and interest

The key distinction: you must own the business (or a qualifying interest in it), not just work for it.

Reporting the deduction: most taxpayers use Form 8995 (Qualified Business Income Deduction Simplified Computation) if their income is below the applicable threshold. Those with more complex situations — such as multiple businesses, aggregation, or income above the thresholds — must use Form 8995-A.

What hasn’t changed:
The types of entities that qualify — and those that don’t — remain the same under the new law. OBBBA’s 2025 changes didn’t expand QBI eligibility to C corporations, W-2 wages, or passive investment income.

Understanding the 2025 Income Thresholds

The QBI deduction starts to get complicated once your total taxable income crosses certain levels. For QBI purposes, “taxable income” means what shows on your Form 1040 after above‑the‑line deductions (e.g., self‑employed health insurance, half of self‑employment tax, retirement contributions) but before the QBI deduction itself.

2025 thresholds where limitations begin (taxable income before QBI):

• Single / all other filers: $197,300

• Married filing jointly: $394,600

Phase‑out range for 2025:

• The QBI wage/property limits (and, for SSTBs, the disallowance) phase in over the next $50,000 (single/other) or $100,000 (MFJ). That means the upper limit for 2025 is:
  
  
  

  • Single / all other: $197,300 + $50,000 = $247,300

  • Married filing jointly: $394,600 + $100,000 = $494,600

What happens at each level (2025):

• Below the threshold: You can generally take 20% of QBI, regardless of business type or employee count.

• Inside the phase‑out range: Your deduction may be limited by W‑2 wages and qualified property (Unadjusted Basis Immediately After Acquisition, or UBIA); SSTBs begin to lose the deduction proportionally.

• Above the upper limit: SSTBs lose the deduction entirely; non‑SSTBs may still get a deduction but only up to the wage/property limit. (General mechanics unchanged by the new law.)

Looking ahead to 2026 (what changed—and what didn’t):

• The law does not reset the thresholds to $75,000 / $150,000. The thresholds continue to be inflation‑adjusted annually.

• What does change starting in 2026 is the width of the phase‑out range: it expands from $50,000 → $75,000 (single/other) and $100,000 → $150,000 (MFJ). Practically, that gives more room before an SSTB’s deduction fully phases out and more room for wage/property limits to apply to non‑SSTBs.

The Service Business Penalty: When Your Expertise Costs You

If you’re in a Specified Service Trade or Business (SSTB) — such as health, law, accounting, consulting, financial services, athletics, performing arts, or certain investment-related activities — the QBI deduction rules tighten considerably once your taxable income crosses certain levels.

2025 SSTB limits:

• Phase-out range — Single/other: $197,300 to $247,300 | MFJ: $394,600 to $494,600

• Above the upper limit — $247,300 (single) / $494,600 (MFJ): the QBI deduction on SSTB income disappears entirely. No amount of W-2 wages or qualified property can restore it.

Inside the phase-out range, the deduction is reduced proportionally until it reaches zero at the upper limit — creating a cliff effect:

Example: A dentist filing jointly with $500,000 of taxable income gets no QBI deduction on practice income. A manufacturer with the same income might still claim a deduction, subject to wage/property limits.

2026 change: The phase-out range widens from $50,000 → $75,000 (single) and $100,000 → $150,000 (MFJ), giving SSTBs more room before the deduction fully phases out. The starting threshold will still be indexed for inflation each year.

How to Calculate Your QBI Deduction

The calculation involves three potential limitations, and you'll use whichever gives you the smallest deduction. The detailed rules are found in Treasury Regulation §1.199A-1, and the deduction itself is claimed on Form 8995 (or Form 8995-A for more complex cases).

Step 1: The Basic 20% Calculation - Start with 20% of your qualified business income. For most businesses, QBI is your net profit after ordinary business expenses but before the deduction for half of self-employment tax, self-employed health insurance, and retirement plan contributions.

Step 2: The Taxable Income Limitation - The deduction can’t exceed 20% of your taxable income (Form 1040, after above-the-line deductions but before the QBI deduction), minus net capital gains. This prevents the deduction from eliminating all your regular income tax.

Step 3: The W-2 Wage and Property Limitation (High Earners Only) - If taxable income is above the thresholds and you’re not in an SSTB, the deduction is capped at the greater of:

• 50% of W-2 wages paid by your business, or

• 25% of W-2 wages plus 2.5% of the original cost of qualified property.

Real-World Examples That Show How This Works

Sarah’s consulting business

Sarah operates a consulting business as a sole proprietor with $800,000 of taxable income from the business. Because consulting is an SSTB and her income is well above the 2025 upper limit ($247,300 single / $494,600 MFJ), she gets no QBI deduction on her consulting income. However, she owns her office building separately through an LLC that produces $60,000 in rental income. Since this rental activity is not an SSTB and meets the IRS trade-or-business standard, she can take a $12,000 QBI deduction on that portion (20% of $60,000).

Marcus’s e-commerce business

Marcus’s online retail business generates $600,000 in QBI. He employs two staff members with $80,000 total W-2 wages and owns $200,000 in qualified property (original cost). Because his taxable income exceeds the 2025 threshold, the wage/property limits apply. His limits are:

• 50% of W-2 wages: $40,000

• 25% of W-2 wages ($20,000) + 2.5% of property ($5,000) = $25,000

• The greater amount ($40,000) is his QBI deduction, producing approximately $12,800 in federal tax savings at a 32% marginal rate.

Jennifer’s dental practice

Jennifer’s dental practice (an SSTB) earns $400,000 in taxable income (MFJ). This is above the 2025 threshold ($394,600) but within the phase-out range ($394,600–$494,600), so the QBI deduction on her practice income is partially reduced. However, she owns the practice building through a separate LLC that earns $60,000 in rental income. Since the rental activity is not an SSTB, she can claim the full $12,000 deduction on that portion (20% of $60,000).

Mistakes That Cost Thousands Every Year

1. Treating all business income as QBI

Capital gains, dividends, interest, and W-2 wages do not qualify as QBI. Only net income from a qualifying trade or business counts — and it must meet the IRS’s definition of a trade or business under §162 (or satisfy the rental safe harbor if it’s real estate). Misclassifying non-QBI income can lead to overstating the deduction and IRS adjustments.

2. Underpaying S-Corp salaries

Some S-Corp owners pay themselves very low W-2 wages to increase pass-through income and maximize QBI. This is risky — the IRS requires “reasonable compensation” for services performed. Underpaying wages can trigger payroll tax adjustments, penalties, and interest, wiping out any tax benefit.

3. Missing aggregation opportunities

If you own multiple related businesses, §199A allows aggregation when certain ownership and operational criteria are met. This can be especially valuable when one business has high wages and another has high qualified property — combining them can increase the allowable QBI deduction. Once you elect to aggregate, you must apply it consistently in future years.

4. Using the wrong property values

For the W-2 wage and property limitation, use the original cost (unadjusted basis immediately after acquisition, or UBIA) of qualified property — not its depreciated value. Using the wrong basis can significantly understate your allowable deduction.

5. Ignoring the phase-out math for SSTBs

For service businesses near or inside the phase-out range, even small changes in taxable income — like deferring revenue or accelerating deductions — can make the difference between a full deduction and none at all. Not planning around this window can be an expensive oversight.

6. Not having proper records

The IRS requires you to be able to document your QBI, W-2 wages, and qualified property. Failing to maintain separate books and records for each business activity, or not keeping a clear trail of your calculations, can lead to the deduction being disallowed in a tax audit — even if you otherwise qualify. See ‘Your Next Steps’ for recordkeeping best practices.

Strategies That Actually Work

1. Strategic timing around income thresholds

For SSTBs and high earners, even small shifts in taxable income can determine whether you get a full, partial, or zero QBI deduction. In 2025, the phase-out range for SSTBs is $197,300–$247,300 (single) and $394,600–$494,600 (MFJ). For example, a consultant (SSTB) filing jointly with $398,600 in taxable income — just $4,000 over the threshold — might restore the full deduction by deferring $5,000 of income into 2026, potentially saving around $4,000 in federal tax.

2. Optimize your business structure

Your entity choice directly impacts QBI eligibility and limits. S-Corporations allow QBI on pass-through income but require reasonable W-2 compensation (reducing QBI). Partnerships and LLCs taxed as partnerships avoid the W-2 wage rule for owners but have other considerations. Review your structure annually — especially before making large compensation or distribution changes.

3. Leverage equipment and property investments

For high-income non-SSTBs, the 2.5% qualified property component can be a game-changer. A manufacturer with $2 million in qualified equipment could generate a $50,000 property limitation (2.5% × $2 million), even with zero employees. For rental real estate, Revenue Procedure 2019-38 offers a safe harbor: perform at least 250 hours of rental services annually, keep separate books and records, and meet other documentation requirements to qualify as a trade or business.

4. Use aggregation rules to your advantage

If you own multiple related businesses, consider electing to aggregate for QBI purposes. This can combine high-wage and high-property businesses to raise your deduction limit. Remember: the businesses must meet IRS ownership and operational criteria, and once you aggregate, you must keep doing so consistently.

5. Separate SSTB and non-SSTB activities

If possible, separate non-SSTB activities (e.g., property ownership, product sales) from SSTB operations. A consulting firm might own its building through a separate entity, generating rental income eligible for QBI even when the consulting income is phased out. This requires careful structuring to avoid anti-abuse rules.

6. Apply the de minimis SSTB rule

Under Treasury Regulation §1.199A-5(c)(2), a business with only a small percentage of SSTB-related gross receipts can be treated as a non-SSTB. If SSTB receipts are ≤ 10% of total gross receipts (for businesses with ≤ $25 million in receipts) or ≤ 5% (for businesses over $25 million), the entire business may escape SSTB treatment — potentially preserving the QBI deduction at higher income levels. Careful tracking of revenue sources is essential to use this rule.

7. Plan ahead for 2026’s wider phase-out range

Starting in 2026, the SSTB phase-out range expands from $50,000 → $75,000 (single) and $100,000 → $150,000 (MFJ). This gives high-earning service businesses more room before losing the deduction entirely — making multi-year income/expense planning even more valuable.

8. Maintain meticulous records

Good documentation isn’t optional. Keep detailed books and records for each business, track W-2 wages and qualified property basis (UBIA), and document your QBI calculations each year. Poor records can cause the IRS to disallow the deduction even if you otherwise qualify.

What the Permanent Extension Means for You

The QBI deduction is now a permanent feature of the tax code under the One Big Beautiful Bill Act. That means you can plan around it with confidence, knowing it won’t disappear after a set expiration date.

What’s changing in 2026:

• The phase-out range for high earners expands from $50,000 → $75,000 (single) and $100,000 → $150,000 (MFJ). This gives more room before the deduction fully phases out for SSTBs and more room for the wage/property limits to apply to non-SSTBs.

• The starting income thresholds will continue to be inflation-adjusted each year — there is no reset to $75,000/$150,000.

New small-business protection (2025 onward):

• If you have at least $1,000 of qualified business income from a business in which you actively participate, you get a minimum $400 QBI deduction per taxpayer, even if limitations would otherwise reduce it. This amount will be indexed for inflation starting in 2026.

What didn’t change:

• The core 20% of QBI or taxable income (minus net capital gains) formula.

• SSTB definitions and the complete phase-out of the deduction above the upper limit for SSTBs.

• The W-2 wage and qualified property (UBIA) limitations for higher-income non-SSTBs.

• Aggregation rules, rental safe harbor standards, and recordkeeping requirements.

Related planning opportunities:
While separate from QBI, the OBBBA also made several other pro-business provisions permanent — including 100% bonus depreciation, higher Section 179 expensing limits, and a full deduction for domestic R&E expenses — making it easier to coordinate QBI planning with broader business investment decisions. 

These changes, combined with QBI’s permanence, create a more predictable environment for long-term business and tax planning.

Your Next Steps

The QBI deduction is one of the largest ongoing tax-saving opportunities for owners of pass-through businesses. Now that it’s permanent, you can build it into both your annual and multi-year planning.

Immediate actions for 2025:

• Run the numbers — Calculate your total taxable income (Form 1040, after above-the-line deductions but before the QBI deduction) to determine if you’re under the threshold, in the phase-out range, or above the upper limit.
  
  
  

• Review your business structure — Confirm your entity type (S corp, partnership/LLC, sole proprietor) is still the best fit for maximizing QBI under 2025 rules.

• Identify aggregation opportunities — If you own multiple related businesses, check whether electing to aggregate would increase your deduction.

• Document key figures — Keep a clear record of W-2 wages paid and the original cost (UBIA) of qualified property; these numbers drive the wage/property limitation.

• Choose the right form — File Form 8995 for straightforward cases below the thresholds, or Form 8995-A for multiple businesses, aggregation, or income above the thresholds.

• Keep your records audit-ready — Maintain separate books and records for each business activity and preserve documentation of your QBI calculations.

Strategic planning for 2026 and beyond:

• Plan around the wider phase-out range — In 2026, the SSTB phase-out range grows from $50k → $75k (single) and $100k → $150k (MFJ), giving more room before the deduction fully phases out.

• Review SSTB strategies — Explore the de minimis SSTB rule or separating non-SSTB activities into different entities to preserve QBI eligibility.

• Time income and expenses — Consider shifting revenue or deductions to fall inside the thresholds or phase-out range for optimal benefit.

• Align major purchases — Coordinate equipment acquisitions with QBI planning and take advantage of the permanent 100% bonus depreciation and enhanced Section 179 limits.

Professional guidance: The QBI deduction isn’t just a one-time tax break, it’s an annual planning opportunity. The challenge is in the mechanics: how you structure your business, pay yourself, or time investments can all affect how much you keep.

That’s where expert help makes the difference.

Town’s CPAs know the rules inside out, and more importantly, how they play out in your industry. We’ll help you avoid costly mistakes, uncover overlooked opportunities, and build a tax strategy that makes the most of QBI now that it’s permanent.

Disclaimer: This content is for educational purposes only and is not intended as personalized tax advice. Tax laws are complex and subject to change. Individual circumstances vary, and strategies that benefit one taxpayer may not be appropriate for another. Always consult a qualified tax professional before making decisions that could affect your tax situation.