Qualified Business Income (QBI) Deduction
A deduction of up to 20% of qualified business income from pass-through entities like sole proprietorships, partnerships, and S corporations, available under Section 199A.
The Qualified Business Income deduction, also known as the Section 199A deduction, allows eligible self-employed individuals and owners of pass-through entities to deduct up to 20% of their qualified business income. This effectively lowers the tax rate on business income by one-fifth.
The deduction is available to sole proprietors, partners, S corporation shareholders, and some trust and estate beneficiaries. For 2025, the full deduction is available without limitation for single filers with taxable income below $197,300 ($394,600 for married filing jointly). Above those thresholds, the deduction may be limited based on W-2 wages paid by the business or the unadjusted basis of qualified property.
Certain specified service trades or businesses (SSTBs) — including health, law, consulting, athletics, and financial services — face additional restrictions. If your income exceeds the phase-out range, SSTB income is completely excluded from QBI. The QBI deduction is taken on line 13 of Form 1040 and reduces taxable income but not AGI.
Related Terms
Sole Proprietor
An individual who owns and operates an unincorporated business by themselves. Business income and expenses are reported on Schedule C of the personal tax return.
Schedule C
The IRS form (Schedule C of Form 1040) used by sole proprietors and single-member LLCs to report business income and expenses. The net profit flows to your personal tax return.
Taxable Income
The portion of your income that is actually subject to federal income tax, calculated by subtracting the standard or itemized deduction from your AGI.
Self-Employment Tax
The combined Social Security (12.4%) and Medicare (2.9%) tax paid by self-employed individuals — effectively both the employee and employer shares of FICA, totaling 15.3%.
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