Hi, I’m Bette Hochberger, CPA, CGMA. If you’re a self-employed individual or a pass-through entity owner, the Qualified Business Income Deduction (QBI) can significantly impact your tax liability. Today’s blog will explain what the QBI deduction is, who qualifies, and how to take advantage of this beneficial tax break.
What is the Qualified Business Income Deduction?
The Qualified Business Income Deduction allows eligible taxpayers to deduct up to 20% of their qualified business income from their taxable income. Introduced by the Tax Cuts and Jobs Act (TCJA) in 2017, this deduction aims to provide tax relief to small business owners and self-employed individuals, helping them keep more of their hard-earned money.
Qualified business income includes income from sole proprietorships, partnerships, S corporations, and some trusts and estates. However, it does not include wages earned as an employee or capital gains.
Who Qualifies for the QBI Deduction?
To qualify for the QBI deduction, you must meet the following criteria:
1. Eligible Business: Your business must be a qualified pass-through entity, like a sole proprietorship, partnership, or S corporation.
2. Qualified Business Income: The income must be considered qualified business income, which excludes certain types of income, such as capital gains and dividends.
3. Income Limitations: The deduction phases out for taxpayers with taxable income over specific thresholds. For 2025, these thresholds are $182,100 for single filers and $364,200 for joint filers.
How to Calculate the QBI Deduction
Calculating the QBI deduction involves a few straightforward steps:
1. Determine Your Qualified Business Income: Identify your net income from the eligible business, subtracting any deductions related to the business.
2. Calculate the Deduction: Multiply your qualified business income by 20% to find the initial deduction amount.
3. Consider Limitations: If your taxable income exceeds the threshold, additional calculations may be required based on the type of business you operate and wages paid to employees.
Benefits of the QBI Deduction
The QBI deduction offers significant advantages for eligible taxpayers. By allowing you to deduct up to 20% of your qualified business income, the deduction can lead to substantial tax savings, effectively lowering your overall taxable income. This deduction also encourages entrepreneurship and investment in small businesses, contributing to economic growth.
The QBI Deduction can be a valuable tool for self-employed individuals and pass-through entity owners. Understanding the requirements and benefits of the QBI deduction is essential for maximizing your tax savings. If you believe you qualify, consider schedule a meeting with us to ensure you’re making the most of this opportunity.
I’ll see you next time!
