The QBI Deduction Is Here to Stay. Are You Ready?

QBI is a popular but complex deduction for business owners. Understanding its limitations helps planners optimize planning opportunities for clients
By
Claire Thornton, CFP®, EA

Journal of Financial Planning: October 2025

 

As a senior financial planner with Apella Wealth (https://apellawealth.com/), Claire Thornton, CFP®, EA, works with women experiencing formative life transitions including the loss of a partner, navigating windfalls, and planning growing careers and families. Claire earned her master of science in taxation from Golden Gate University.

JOIN IN THE DISCUSSION: Discuss this article with fellow FPA Members through FPA's Knowledge Circles​​​​. ​​​

FEEDBACK: If you have any questions or comments on this article, please contact the editor HERE. 

 

The qualified business income (QBI) deduction, created under the Tax Cuts and Jobs Act, was originally set to sunset at the end of 2025. However, with the passage of the One Big Beautiful Bill Act (OBBBA), this deduction is now a permanent feature of the tax code. For many business owners, this provides long-term certainty on a popular tax deduction. For advisers, we can no longer rest on its expiry and are instead presented an opportunity to refresh—or learn for the first time—the mechanics of this complicated calculation to best serve our clients with pass-through entities.

The Basics

The QBI deduction (IRC Section 199A) allows eligible taxpayers to deduct up to 20 percent of qualified business income (QBI) from pass-through entities, including sole proprietorships, partnerships, and S corporations. The specifics of the deduction amount depend on the type of business (qualified trade or business versus specified service trade or business), taxable income level, W-2 wages, and property basis. Note that the overall deduction is limited to the lesser of 20 percent of qualified business income or 20 percent of taxable income (net of capital gains).1 And, in the spirit of simplicity, OBBBA has enacted an inflation-adjusted minimum deduction of $400 for taxpayers who have at least $1,000 of qualified business income.

What qualifies as qualified business income? It is easier to focus on what doesn’t qualify. Capital gains and losses, dividends, interest income (unless related to the business), wages paid to an owner, and guaranteed payments from a partnership are all excluded from qualified business income.

The Complexities

To best digest the rules related to QBI deduction thresholds, I organize taxable income thresholds into Bucket A, Bucket B, and Bucket C. For taxpayers with qualified business income, the total taxable income thresholds for 2025 are as follows:

  • Married Filing Jointly (MFJ): Bucket A < $394,600 | Bucket B = $394,600–$494,600 | Bucket C > $494,600
  • Single/Head of Household: Bucket A < $197,300 | Bucket B = $197,300–$247,300 | Bucket C > $247,300

For a Qualified Trade or Business

  • If total taxable income falls within Bucket A, the deduction is limited to the lesser of 20 percent of qualified business income, or 20 percent of taxable income minus net capital gains.
  • If total taxable income falls within Bucket B, we must apply wage and property limits, which is the greater of 50 percent of W-2 wages, or 25 percent of W-2 wages + 2.5 percent of qualified property basis. Then, we apply a phaseout calculation (taxable income – start of phaseout) / $75,000 ($150,000 MFJ).
  • If income is in Bucket C, the phaseout calculation does not apply, and the deduction is subject just to the wage and property limit (the greater of 50 percent of W-2 wages, or 25 percent of W-2 wages + 2.5 percent of qualified property basis).

Let’s put these rules into action by taking a qualified trade or business with taxable income in Bucket B ($394,600–$494,600).

Jane owns ABC Company, an S corporation. She files married filing jointly. Their total taxable income is $420,000. Her qualified business income is $300,000 and she pays herself W-2 wages of $80,000. Her business holds qualified depreciable property worth $200,000. Jane also has net capital gains of $20,000 from their investment portfolio.

Step 1. Start with the baseline 20 percent test.

  • 20 percent × QBI of $300,000 = $60,000 tentative QBI deduction
  • 20 percent × ($420,000 taxable income – $20,000 capital gains) = $80,000
  • So, the baseline deduction equals $60,000 because it is less than 20 percent of taxable income minus capital gains. However, Jane is in the phaseout range, so we must continue to step 2 and step 3.

Step 2. Wage and property limit calculation.

  • 50 percent × W-2 wages of $80,000 = $40,000
  • (25 percent × W-2 wages of $80,000) + (2.5 percent × qualified property of $200,000) = $20,000 + $5,000 = $25,000
  • Jane must apply the greater of the two calculations, so the wage and property limit is $40,000.

Step 3. Apply phaseout percentage.

  • Phaseout percent = ($420,000 taxable income – $394,600 beginning of phaseout range) / $150,000 ≈ 17 percent
  • $60,000 tentative QBI deduction – $40,000 wage/property calculation = $20,000. Jane’s phaseout adjustment = $20,000 × 17 percent = $3,400

Step 4. Calculate the final deduction.

  • $60,000 QBI deduction – $3,400 phaseout calculation = $56,600

Fact pattern change. What if Jane’s joint taxable income changes to $520,000? Then she can skip step 3, as there is no phaseout range to factor in, and her QBI deduction will be lower:

  • 50 percent × W-2 wages of $80,000 = $40,000
  • (25 percent × W-2 wages of $80,000) + (2.5 percent × qualified property of $200,000) = $20,000 + $5,000 = $25,000
  • Jane must apply the greater of the two calculations, so the wage and property limit is $40,000. Her QBI deduction is $60,000 – $40,000 = $20,000, a significant reduction.

For a Specified Service Trade or Business

A specified service trade or business (SSTB) is defined under Section 1202(e)(3)(A) to include professions in health, law, accounting, consulting, athletics, financial services, and the performing arts. The application of the QBI rules are as follows:

  • If income is within Bucket A, the deduction is limited to the lesser of 20 percent of qualified business income, or 20 percent of taxable income minus net capital gains.
  • If income is within Bucket B, we must first apply an applicable percentage calculation, which is a rather involved process. The wage and property limit calculation is then applied to the “sanitized” numbers. In short, a taxpayer who owns an SSTB will have a smaller QBI deduction within Bucket B than a business owner of a qualified trade or business, which further highlights the impact of reducing taxable income into Bucket A for an SSTB, whenever possible.
  • If income is in Bucket C, the deduction is fully phased out.

The Bottom Line

As planners, we are not responsible for calculating the QBI deduction. However, the more intimately we are familiar with its mechanics, the more effectively we can help clients optimize planning opportunities like when and how much to contribute to a retirement plan, maximizing itemized deductions, or controlling the timing on deferring versus realizing capital gains and other income sources, wherever possible. 

Endnote

  1. Tax professionals computing the Section 199A deduction for taxpayers in the 37 percent tax bracket, who are now subject to the itemized deduction limitation under OBBBA, should ensure that their software is adding back any disallowed itemized deductions in calculating taxable income for purposes of the Section 199A deduction.
Topic
Tax Planning

SHARE

Related Events