The qualified business income (QBI) deduction, under section 199A, allows many owners of sole proprietorships, partnerships, S corporations and some trusts to deduct up to 20% of their qualified business income on their personal returns. The IRS explains it on its QBI deduction page. It is claimed on Form 8995 or Form 8995-A.

What counts as qualified business income

QBI is the net amount of income, gain, deduction and loss from a qualified trade or business conducted in the United States. It does not include:

  • Wages an S corporation owner receives from the business
  • Guaranteed payments to partners for services
  • Capital gains and losses, and most interest and dividend income

That is one reason S corporation reasonable compensation interacts with the QBI deduction: higher wages reduce QBI.

Below the income threshold

For taxpayers with taxable income below an annually adjusted threshold, the deduction is generally the lesser of 20% of QBI or 20% of taxable income minus net capital gain. The type of business and wages paid do not matter below the threshold.

Above the threshold

Above the threshold, two limitations phase in:

  1. Specified service trades or businesses (SSTBs), such as health, law, accounting, consulting, financial services and athletics, lose the deduction progressively as income rises
  2. The W-2 wage and property limit: the deduction for each business is capped based on W-2 wages paid by the business and the unadjusted basis of its qualified property

The thresholds and phase-in ranges are adjusted each year and published by the IRS.

Losses carry forward

If a business has a qualified business loss, it reduces QBI from other businesses that year, and any net loss carries forward to reduce QBI in future years.

What your books need to support

  • Clean separation of business and non-business income
  • W-2 wages paid by each business
  • Unadjusted basis of qualified property from the fixed asset register
  • For owners with several businesses, separate profit figures for each

Interaction with planning decisions

The QBI deduction affects choices such as entity type, owner wages and retirement contributions, because each changes QBI or taxable income. Those decisions should be modeled with the numbers, not rules of thumb; see business structure tax considerations. Our tax services include QBI calculations for pass-through owners.

What your bookkeeping should provide

The deduction depends on figures that come from your records: qualified business income by business, W-2 wages paid by each business and, for some taxpayers, the unadjusted basis of qualified property. Keep payroll, fixed asset records and separate income statements for each business so your preparer can compute it. The IRS's QBI deduction page summarizes the rules.

Owners of several businesses should ask whether aggregation rules apply, since they can affect the wage and property limits.

Rules can change, so confirm current limits each year.

Key terms

Definitions for terms used in this guide, from our small business glossary:

  • Guaranteed Payments: Guaranteed payments are payments a partnership makes to a partner for services or use of capital, regardless of profit.
  • Capital Gains: A capital gain is the profit from selling a capital asset for more than its tax basis.