Tax Topic
QBI Deduction: The 20% Pass-Through Tax Break
The Qualified Business Income (QBI) deduction lets eligible self-employed individuals and pass-through business owners deduct up to 20% of their qualified business income. For
Overview
The QBI deduction (Section 199A) lets you deduct up to 20% of your qualified business income from pass-through entities (sole proprietorships, partnerships, S-corps, LLCs). If you earn $100,000 in qualified business income, you can deduct $20,000, reducing your taxable income to $80,000. Income thresholds and specified service business rules may limit your deduction at higher income levels.How the QBI Deduction Works
The QBI deduction is an above-the-line deduction equal to 20% of your qualified business income from pass-through entities. It does not reduce self-employment tax — only income tax. You don't need to itemize to claim it. The deduction is the lesser of: 20% of QBI, or 20% of taxable income minus net capital gains. It's reported on Form 8995 (simplified) or Form 8995-A (detailed).Who Qualifies
Most self-employed individuals and pass-through business owners qualify if their taxable income is below the threshold: $197,300 (single) or $394,600 (married filing jointly) for 2025. Above these thresholds, the deduction phases out for specified service trades or businesses (SSTBs) — which includes health, law, consulting, accounting, athletics, financial services, and performing arts. Non-SSTB businesses above the threshold are subject to W-2 wage and property limitations.Example: Freelance Designer
You're a freelance designer (sole prop) with $120,000 net profit after all business deductions. Your QBI deduction: $120,000 x 20% = $24,000. Your taxable income drops from $120,000 to $96,000. At the 22% bracket, that saves you $5,280 in federal income tax. Note: this doesn't reduce your self-employment tax, which is still calculated on the full $120,000.
Specified Service Businesses
If you're in a specified service trade or business (SSTB) and your taxable income exceeds the threshold, your QBI deduction phases out completely over a $50,000 range (single) or $100,000 range (married filing jointly). Once your income exceeds $247,300 (single) or $494,600 (MFJ), you get zero QBI deduction for SSTB income. Engineering and architecture are specifically excluded from the SSTB definition — they always qualify.
If you're in a specified service trade or business (SSTB) and your taxable income exceeds the threshold, your QBI deduction phases out completely over a $50,000 range (single) or $100,000 range (married filing jointly). Once your income exceeds $247,300 (single) or $494,600 (MFJ), you get zero QBI deduction for SSTB income. Engineering and architecture are specifically excluded from the SSTB definition — they always qualify.
Estimate Your QBI Deduction
Hivebooks tracks your qualified business income by entity and estimates your Section 199A deduction, so you can see the tax savings in real time.
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