The Qualified Business Income (QBI) deduction, also known as the Section 199A deduction, is a powerful tax-saving tool for small business owners, freelancers, and self-employed individuals. It allows eligible taxpayers to deduct up to 20% of their qualified business income, potentially reducing their overall tax liability significantly.
Benefits of the QBI Deduction
- Tax Savings for Pass-Through Entities: The QBI deduction is available to pass-through entities such as sole proprietorships, partnerships, S Corporations, and LLCs. This allows business income to benefit from a lower effective tax rate.
- No Need to Itemize: The QBI deduction is a below-the-line deduction, meaning you can claim it even if you take the standard deduction instead of itemizing.
- Encourages Small Business Growth: By reducing taxable income, the QBI deduction frees up more funds to reinvest in your business or personal goals.
- Applies to a Wide Range of Businesses: The deduction covers most types of businesses, from real estate and retail to professional services, provided income thresholds are met.
Strategy
To maximize the QBI deduction, keep your taxable income below the phase-out thresholds. For 2025, these thresholds are:
- $364,200 for married filing jointly
- $182,100 for single filers
If your income exceeds these thresholds, consider strategies like contributing to a retirement account, making charitable donations, or deferring income to stay within the limits.
Important Considerations
- Specified Service Trades or Businesses (SSTBs): Certain fields, like law, accounting, and consulting, face limitations if taxable income exceeds the phase-out thresholds.
- W-2 Wages and Property Test: High earners may need to factor in W-2 wages paid by the business or the unadjusted basis of depreciable property to calculate the deduction.
- Aggregation of Businesses: If you own multiple businesses, aggregating them may help maximize the deduction, but it requires careful analysis and compliance with IRS rules.
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