Qualified Business Income Deduction (QBI Deduction), also known as Section 199A Deduction of the Tax Cuts and Jobs Act of 2017, is an important tax benefit in the US tax law, which aims to reduce the tax burden of small business owners and self-employed persons. This article will systematically analyze the basic concepts, scope of application, calculation rules and restrictions of the QBI deduction to help taxpayers make reasonable use of this tax benefit.
1. What is the QBI deduction?
The QBI deduction allows eligible taxpayers to deduct up to 20% of their qualified business income. Qualified business income refers to the net amount of net income, gains, deductions and losses from a qualified trade or business. The deduction applies to:
- Sole proprietorships
- Partnerships
- S-corporations
- Certain trusts and estates
But it does not apply to C-corporations or salary income received as an employee.
2. Two major components of the QBI deduction
- QBI portion
This portion is a deduction of 20% of qualified business income generated by a qualified trade or business. This portion of the deduction is subject to the taxpayer’s taxable income, the total amount of W-2 wages paid, and the unadjusted basis (UBIA) of qualified property held by the business. In addition, members of agricultural or horticultural cooperatives may be subject to the “customer relief.” - REIT and PTP portion
This portion of the deduction is 20% of qualified real estate investment trust (REIT) dividends and publicly traded partnership (PTP) income. Unlike the QBI portion, the REIT/PTP deduction is not subject to wage or property basis, but eligibility for the deduction of PTP income may be limited by the type of business and the taxpayer’s income level.
3. Who is eligible for the QBI deduction?
- Taxpayers with “pass-through” business income, such as sole proprietors, partners, S-corporation shareholders, and single-member limited liability company (LLC) owners.
- Income thresholds must be met. The full deduction threshold for single filers in 2025 is taxable income of no more than $197,300, and no more than $394,600 for joint filers.
- For taxpayers who exceed the threshold, the deduction amount will be gradually reduced or eliminated based on factors such as the nature of the business, wage payments, and qualified property basis.
4. Limitations and exclusions to QBI deductions
- Specified Service Trade or Business (SSTB) Restrictions
Including businesses in the fields of medical, legal, accounting, consulting, financial services, performing arts, etc., if the taxpayer’s income exceeds the threshold, the deduction will be limited or even eliminated. - Income not included in QBI
C-corporation income, wage income, capital gains, non-business-related interest income, foreign business income, rental income (unless it meets the definition of trade or business), guaranteed payments from partnerships, etc. - Deduction does not affect adjusted gross income (AGI)
The QBI deduction does not reduce the self-employment tax base, nor does it affect the calculation of the 3.8% net investment income tax (NIIT).
5. How to calculate the QBI deduction?
- Calculate 20% of qualified business income.
- Calculate 20% of qualified REIT dividends and PTP income.
- Add the two parts together, and the result must not exceed 20% of the taxpayer’s taxable income minus net capital gains.
- If the income exceeds the threshold, the deduction amount must be adjusted based on salary payments and qualified property basis.
6. The tax planning significance of the QBI deduction
- Reducing the tax burden on small business owners and self-employed individuals
By deducting qualified business income, reduce taxable income and increase cash flow. - Incentives for investment and employment
Through wage and asset basis restrictions, encourage companies to increase employees and capital investment. - Complexity requires professional guidance
Due to the involvement of multiple restrictions and phase-out rules, it is recommended that taxpayers work with professional tax advisors to develop reasonable plans.
As an important tax benefit in the Tax Cuts and Jobs Act, the QBI deduction has brought substantial tax relief to pass-through business owners. Understanding its scope of application, calculation method and restrictions will help taxpayers to make reasonable use of the policy and optimize their tax structure. In the face of complex restriction rules, professional consultation is particularly important to ensure maximum tax benefits.