The qualified business income (QBI) deduction, introduced by the Tax Cuts and Jobs Act, allows eligible self-employed individuals and small business owners to deduct up to 20% of their qualified business income. For a business earning $200,000 in qualified income at a 24% marginal rate, that deduction saves approximately $9,600 per year.
Who Qualifies
Most pass-through business owners—sole proprietors, S-Corp shareholders, partnership members, and LLC owners taxed as pass-throughs—are eligible for the QBI deduction. The deduction phases out for specified service trades or businesses (SSTBs) like law, health, consulting, and financial services at higher income levels ($191,950 single, $383,900 married filing jointly for 2024).
W-2 Wage and Property Limitations
For businesses above the income thresholds, the deduction is limited to the greater of (a) 50% of the W-2 wages paid by the business or (b) 25% of W-2 wages plus 2.5% of unadjusted basis of qualified property. These limitations can significantly reduce the available deduction for high-income businesses.
Key Takeaways
- The QBI deduction can be worth up to 20% of qualified business income—one of the most valuable TCJA provisions for small business owners.
- Service businesses (law, consulting, health, finance) phase out above income thresholds of approximately $191K single / $383K married.
- W-2 wage limitations apply above the phase-out threshold—evaluate whether paying more in wages increases your available deduction.
