The 20% QBI Deduction (§199A)

Section 199A lets owners of pass-through businesses — sole proprietorships, partnerships, S-corporations, and most LLCs — deduct up to 20% of their qualified business income (QBI) on their personal return. It reduces income tax only; it does not reduce self-employment tax, and it never applies to wages or to C-corporation income. Congress made it permanent in 2025 (P.L. 119-21) — it no longer expires.

BELOW THE THRESHOLD, IT IS SIMPLE: if your taxable income (figured before the QBI deduction) is at or below $197,300 single or $394,600 married filing jointly for 2025 (Rev. Proc. 2024-40), you generally get the full 20% — computed on the short Form 8995. Most small businesses live here.

ABOVE THE THRESHOLD, LIMITS PHASE IN over the next $50,000 of income ($100,000 for joint filers — so the limits are fully in force above $247,300 / $494,600 for 2025). Two limit families arrive: (1) a cap based on W-2 wages the business paid and the cost of its qualified property; and (2) the SSTB rule — owners of a 'specified service trade or business' (health, law, accounting, consulting, financial services, athletics, performing arts, and similar fields) see the deduction shrink across the phase-in range and disappear entirely above it.

ONE MORE CAP applies at every level: the deduction cannot exceed 20% of your taxable income minus net capital gain. Form 8995-A does the full computation when the simple form no longer applies.

Common mistakes: assuming the deduction lowers self-employment tax (it does not); counting an S-corp owner's own W-2 wages as QBI (wages are never QBI); and learning about the SSTB phase-out after the year has closed, when nothing can be re-planned.