QBI deduction: Who qualifies and how to claim it

Paying more tax than necessary drains resources that could be fueling your business growth. 

One of the most effective ways to keep more of your earnings is by taking advantage of the Qualified Business Income (QBI) deduction.

To make the most of it, you need to understand who qualifies, how the calculation works, and the exact steps to claim it without errors.

What is QBI deduction?

The QBI deduction, also called the Section 199A deduction, allows eligible pass-through businesses to deduct up to 20% of their qualified business income.

Qualified business income generally refers to your net profit from business operations.

However, note that it excludes items such as the following:

• Capital gains and losses
• Dividend income
• Interest not properly allocable to the business
• Wages earned as an employee

The deduction was created under the Tax Cuts and Jobs Act (TCJA) of 2017 to level the playing field for small and mid-sized businesses.

For you, this means more funds available for reinvestment, hiring, or simply strengthening your balance sheet.

Who qualifies for the QBI deduction

Not every business qualifies automatically. Your eligibility depends on the structure of your business, your type of activity, and your taxable income.

Pass-through entity

The deduction is limited to pass-through businesses:

• Sole proprietorships
• Partnerships
• S corporations
• LLCs taxed as any of the above

If your company is a C corporation, you cannot take advantage of the QBI deduction. This makes entity choice critical when planning for tax efficiency.

Specified service trades or business (SSTBs)

Some industries face restrictions.

Professions such as law, accounting, health care, financial services, athletics, and consulting are classified as specified service trades or businesses (SSTBs).

Non-SSTBs over the threshold

Non-SSTBs enjoy more favorable treatment, but once your taxable income exceeds the thresholds, the QBI deduction calculation becomes more complex.

The deduction is limited by:

• W-2 wages your business pays
• The unadjusted basis of qualified property held by the business

This rule ensures businesses are paying wages and investing in assets, not just generating passive income. For you, this means payroll and property planning can directly influence the deduction available.

Special cases

Other situations can also impact eligibility:

• Multiple businesses: Each business must be reviewed separately, though aggregation may be allowed.
• Trusts and estates: Certain trusts and estates with business income can also qualify.
• Losses: Business losses reduce qualified business income, and carryforward rules may limit future deductions.

How to calculate QBI deduction?

The QBI deduction is not always a straightforward 20%. It depends on your taxable income and your business type.

The general formula is:

QBI deduction = Lesser of (20% of qualified business income) OR (20% of taxable income excluding capital gains)

Example 1:

Suppose your LLC earned $100,000 in qualified business income this year. Your taxable income (excluding capital gains) is $95,000.

Let’s look at the computation table below:

In this case, you deduct $19,000 because the deduction is the lesser of the two amounts.

Example 2: 

Now imagine your S corporation generates $500,000 in QBI, and your taxable income is $520,000. You also paid $120,000 in W-2 wages and own $400,000 in qualified property.

For higher-income non-SSTBs, the deduction is limited by the greater of:

• 50% of W-2 wages or;
• 25% of W-2 wages + 2.5% of qualified property basis

In this case, the QBI deduction is limited to $60,000 due to the wage/property test, even though 20% of QBI would have been $100,000.

How to claim the QBI deduction

Claiming the deduction is not automatic; you must follow the IRS process carefully.

Determine your eligibility

Check your business entity type, then verify whether your business is considered an SSTB. Next, review your taxable income to know if thresholds apply.

Calculate your deduction

Perform the calculation based on your situation: under the threshold, above it as a non-SSTB, or as an SSTB.

Always test different scenarios, particularly if your taxable income is close to the limits.

Complete the required IRS form

You report the deduction using:

• Form 8995 – (Qualified Business Income Deduction – Simplified Computation) for straightforward cases
• Form 8995-A – For more complex calculations, including businesses above the income thresholds

As the owner, you must ensure your business records feed into these forms accurately. Mistakes may trigger audits or reduce your deduction.

Maintain proper records

The IRS requires documentation to support your claim. Strong records not only protect you during audits but also streamline future filings.

Keep the following documents:

• Profit and loss statements
• Payroll records for W-2 wages
• Property purchase and depreciation records
• Evidence of losses carried forward

Consider professional help to claim the QBI deduction

The QBI deduction is valuable but technical. As your business grows, the complexity increases. Partnering with a tax professional ensures you do not miss out on savings.

A professional can:

• Verify your business entity and activity classification
• Calculate the deduction under multiple scenarios
• Advise on payroll and property planning to maximize the deduction
• Ensure compliance with IRS forms and rules

Working with a trusted advisor shifts the burden off your shoulders and helps preserve more of your income for reinvestment.

Do not overlook this opportunity, as it could be one of the most impactful tax strategies for your business.