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The qualified business income deduction (QBI deduction) has been one of the more generous tax benefits available to business owners since it was introduced by the Tax Cuts and Jobs Act of 2017. Designed to give a break to individuals with pass-through business income, this provision can reduce taxable income by up to 20% of qualified business income. However, with its expiration set for the end of 2025, time is ticking for taxpayers to take full advantage.

Understanding who qualifies and how to calculate this deduction can be complex, especially with limitations tied to income levels and business type. But with a solid grasp of the basics—and some strategic planning—you can potentially unlock meaningful tax savings.

What is the Qualified Business Income Deduction?

At its core, the qualified business income deduction allows eligible individuals to deduct up to 20% of qualified business income from certain types of businesses. These businesses include:

• Sole proprietorships,
• Single-member LLCs treated as sole proprietorships,
• Partnerships and multi-member LLCs taxed as partnerships,
• S corporations.

The deduction is available to individuals who report income from these entities on their personal tax returns. That means while the business itself doesn’t take the deduction, the owner can benefit directly on their individual tax return.

Qualified business income generally includes net income from the business, but certain deductions must be subtracted first. These include:

• The deduction for contributions to self-employed retirement plans,
• 50% of the self-employment tax,
• Self-employed health insurance premiums.

It’s also important to note that not all income qualifies. Wages earned as an employee, guaranteed payments to partners, and shareholder wages from S corporations are excluded from QBI. Similarly, C corporation income isn’t eligible.

Specified Service Trades or Businesses (SSTBs)

Some professions face additional hurdles in claiming the QBI deduction. These are known as Specified Service Trades or Businesses (SSTBs). SSTBs include:

• Health professionals (such as doctors, nurses, and dentists),
• Lawyers,
• Accountants and actuaries,
• Consultants,
• Financial and investment advisors,
• Brokers,
• Athletes and performers.

The key characteristic of an SSTB is that the business relies on the skill or reputation of one or more employees or owners. Originally, this raised concerns that many businesses—like a restaurant with a famous chef—could unintentionally be classified as SSTBs. Thankfully, IRS regulations clarified that only businesses where income is earned through endorsements, the use of personal likeness, or public appearances fall into this special category under the “reputation or skill” definition.

For owners of SSTBs, the qualified business income deduction is phased out entirely once income reaches certain thresholds.

Deduction Limitations and Thresholds

The value of your QBI deduction depends on your taxable income. For 2025, the phase-out of the deduction begins when taxable income exceeds:

• $197,300 for single filers,
• $394,600 for married couples filing jointly.

Once income surpasses $247,300 (or $494,600 for joint filers), SSTB owners lose the ability to claim the deduction entirely.

But even if you’re not in an SSTB, higher earners face another hurdle: the wage and capital tests. If your income exceeds the thresholds mentioned above, your deduction is limited to the greater of:

1. 50% of W-2 wages paid by the business, or
2. 25% of W-2 wages plus 2.5% of the original cost (unadjusted basis) of qualified property.

These rules are intended to ensure the deduction rewards businesses that employ workers or invest in physical assets like buildings or equipment.

For instance, a capital-heavy business like a hotel or manufacturer could still qualify for the full deduction even at higher income levels, as long as it has sufficient payroll or depreciable property.

Aggregating Businesses to Boost the Deduction

Taxpayers who own multiple businesses may be able to aggregate them to get a better deal. Aggregation means combining income, wages, and property from multiple entities when calculating the deduction.

Why does this matter? Suppose one business has high income but few employees, while another has low income but lots of W-2 wages. Aggregating could increase the wage base and allow for a larger qualified business income deduction overall.

However, aggregation is only allowed if certain IRS requirements are met—primarily that the businesses are commonly controlled and offer products or services that are related. Importantly, SSTBs cannot be aggregated with any other business, not even another SSTB.

Why Planning is Key

Since the qualified business income deduction does not reduce adjusted gross income or self-employment tax, it operates more like an itemized deduction—but without requiring you to itemize. However, it does not reduce net investment income for purposes of the 3.8% net investment income tax, which is something higher-income individuals should factor into their planning.

The deduction is also limited to 20% of your taxable income (before the deduction and net capital gains). So, even if your business qualifies, you might not get the full deduction if your taxable income is too low or composed largely of investment income.

This makes it critical to understand your income composition and business structure, especially if you’re close to the income limits. Strategic moves—such as adjusting owner compensation, deferring income, or maximizing retirement contributions—can make a meaningful difference.

Don’t Miss the Deadline

The qualified business income deduction is currently set to sunset after 2025. While Congress could extend it, there’s no guarantee. If your business is eligible, now is the time to act.

For owners of SSTBs, the phase-out rules and tighter restrictions make early planning even more vital. Understanding where your income falls relative to the thresholds can help you optimize your tax situation before the deduction disappears.

Partner With a Trusted Advisor

Tax laws are complicated, and the qualified business income deduction is no exception. Between SSTB rules, wage and capital limitations, and aggregation strategies, the calculation can get tricky fast.

That’s where professional guidance comes in. With the right strategy, you can make the most of the deduction before it potentially vanishes.

Looking to Maximize Your QBI Deduction Before It Expires?

Let the tax professionals at Burton McCumber & Longoria help you make the most of your opportunities. We’ll work with you to understand your business structure, income, and available strategies to help minimize your tax liability and keep more of what you earn. Contact us today to get started.