Qualified Business Income Deduction: Who Gets It and How It Works

Qualified Business Income Deduction: Who Gets It and How It Works

The qualified business income deduction lets many owners of pass-through businesses deduct up to 20 percent of their business income when they figure taxable income. It is found in Section 199A of the tax code, and it exists because a sole proprietor, partner or S corporation shareholder pays tax on business profit at personal rates, while a C corporation pays a flat corporate rate.

It is a deduction, not a credit, and it has limits that matter more the higher your income goes. Here is how it works, who gets it and where people trip. This is a general explainer, not advice for your return.

One place to ask about the application to your situation is Doug Johnson CPA, a Los Angeles firm whose live profile lists SMB Owners and Growing Companies among its specialties. Doug Johnson CPA is a vetted Sam's List member and a paying member of our featured program; payment does not buy the language we use or its reviews.

What the Qualified Business Income Deduction Is

The deduction applies to owners of pass-through businesses: sole proprietorships, partnerships, S corporations and certain trusts and estates. Wages you earn as an employee are not covered, and neither are C corporation profits.

In its basic form the deduction is up to 20 percent of your qualified business income, which is the net profit from a qualifying business after deductions. It is also capped by a percentage of your overall taxable income, so it cannot exceed a set share of what you would otherwise be taxed on.

The deduction is taken on your personal return and lowers taxable income. It does not reduce the profit that flows to your return, and it does not lower self-employment tax or the payroll taxes you owe.

The limitation: a 20 percent deduction is not a 20 percent tax cut. The savings are the deduction multiplied by your tax rate, so someone in a lower bracket saves less.

What Counts as Qualified Business Income

Qualified business income is the net income from a trade or business that is conducted in the United States, after the deductions that belong to it. It generally excludes investment income such as capital gains and most interest and dividends (other than qualified REIT dividends and publicly traded partnership income, which have their own rule), wages you pay yourself from an S corporation, and guaranteed payments to a partner for services.

That last exclusion matters for S corporation owners. The salary you pay yourself is not qualified business income. Only the profit that remains counts. A higher salary reduces the base for the deduction, so the salary decision and the deduction are linked.

Losses matter too. A net loss from a qualified business in one year can carry forward and reduce the deduction in later years.

The limitation: what counts depends on how your business is organized and reported. If you have several businesses, the calculation is done by business, and a loss in one can reduce the deduction from another.

Specified Service Trade or Business Rules and the Qualified Business Income Deduction

Some professions are treated differently. A specified service trade or business is one where the main asset is the skill or reputation of the owners or employees, and the list includes health, law, accounting, consulting, financial services and athletics, among others.

For these businesses, the deduction phases out as taxable income rises above a threshold range and can disappear entirely above the top of it. Engineering and architecture are carved out of the list, which surprises some people.

This is the rule that most often catches professional-practice owners. A consultant who qualifies in a lower-income year can lose the deduction in a higher-income one.

The limitation: whether your work falls on the list is a judgment about what the business does, and edge cases are common. If your business mixes services and products, the allocation needs support.

The W-2 Wage Limit and Property Limit Above the Threshold

Above the income threshold, a second limit, based on W-2 wages and property, applies to every qualifying business, including specified service businesses in the phase-in range. The deduction for each business is capped at the greater of two figures: a share of the W-2 wages the business pays, or a smaller share of those wages plus a share of the unadjusted basis of qualified property.

In plain terms, higher-income owners generally need a business that pays wages or owns equipment and property in order to claim the full deduction. A solo owner with high profit and no employees can find the deduction reduced or eliminated.

Within the phase-in range, the limits are applied gradually instead of all at once. That makes the planning more nuanced, and it is one reason owners near the threshold ask for a projection.

The limitation: paying more wages only to raise the cap can cost more in payroll tax and compensation than the deduction is worth. Run the numbers on both sides before changing anything.

Current Status After the 2025 Legislation

The deduction was originally set to expire after 2025. Legislation passed in 2025 made it permanent and adjusted parts of how it works, so it continues for 2026 and later years. Check current IRS guidance for the thresholds, the phase-in range and any changes to the minimum deduction before you plan, because the figures are adjusted over time.

For planning, the practical point is that the deduction is permanent under current law, but you cannot count on a particular dollar threshold being the same next year.

The limitation: tax law changes, and this section reflects the rule as understood at the date of this post. Verify the current-year figures from the IRS before relying on any of them.

Where Doug Johnson CPA Fits

Doug Johnson CPA is based in Los Angeles, founded in 2024, with three employees, serving clients nationwide. Its live profile positions the firm for growing businesses in the $250,000 to $10 million revenue range and for high earners with equity compensation, and lists SMB Owners, Equity Compensation, High Net Worth Individuals and Growing Companies as specialties.

Doug Johnson CPA has 15 verified client reviews on Sam's List. Each review is submitted by an individual who identifies as a client of the firm and rates it on communication, subject-matter knowledge, and overall satisfaction. Reviews reflect those individual experiences and do not represent an endorsement by Sam's List. Doug Johnson CPA is a paying member of our featured program, and payment does not buy its reviews. Ratings and rankings are not indicative of future performance or results.

The limitation, plainly: the profile lists minimums of $250,000 in income and $250,000 in revenue, so an owner with a smaller income may fall outside them. It does not say whether the firm prepares projections for this deduction, so ask what it models and how often.

Frequently Asked Questions

What is the qualified business income deduction?

It is a deduction of up to 20 percent of qualified business income for owners of pass-through businesses, subject to limits based on taxable income, type of business and wages or property. It lowers taxable income on your personal return and is also called the Section 199A deduction.

Who qualifies for the qualified business income deduction?

Owners of sole proprietorships, partnerships, S corporations and certain trusts and estates with qualifying business income. Employees and C corporation shareholders do not qualify on their wages or dividends. Higher-income owners face additional limits depending on the type of business.

Does the qualified business income deduction reduce self-employment tax?

No. It lowers income tax by reducing taxable income, but it does not reduce the profit on which self-employment tax is figured. The two taxes are calculated separately, and the deduction affects only the income tax side.

What is a specified service trade or business?

It is a business whose main asset is the skill or reputation of its owners or employees, such as health, law, accounting, consulting or financial services. Above the income threshold range, these businesses lose some or all of the deduction.

Before you plan around the deduction, gather last year's pass-through income, any wages the business paid and your expected taxable income for this year. You can browse accountants on Sam's List, including the firm above, and ask each one how it projects the deduction.

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About the author: Kimberly Green is the cofounder of Sam's List, where business owners and high earners find vetted CPAs, financial advisors, and fractional CFOs. She's met one-on-one with 400+ financial professionals and writes from the real data behind thousands of client-advisor matches. Ask her anything about finding an accountant - she's heard it all, including the questions people are afraid to ask.