What Is the QBI Deduction? The 20% Break for 2025

The QBI deduction, short for qualified business income deduction, lets eligible self-employed people and pass-through business owners deduct up to 20 percent of their business income before tax is figured. It comes from Section 199A of the tax code, costs you nothing out of pocket, and lowers your taxable income. If you net $80,000 from freelancing, a full QBI deduction can knock about $16,000 off the income you are taxed on.

What counts as qualified business income

Qualified business income is the net profit from a qualified US trade or business: your revenue minus your deductible business expenses. For a freelancer or sole proprietor that is the bottom line of Schedule C. For a partner or S corporation shareholder it is the ordinary business income reported on the Schedule K-1 you receive.

Some income looks like business income but does not qualify. QBI does not include the wages you earn as an employee, capital gains and losses, dividends, interest that is not tied to the business, or income earned outside the United States. A separate 20 percent deduction applies to qualified real estate investment trust (REIT) dividends and publicly traded partnership income, computed the same way.

Who can claim the 20 percent deduction

The QBI deduction is for pass-through businesses, the kind where profit flows to your personal return and is taxed at your individual rate. That covers most small operators:

• Sole proprietors and single-member LLCs filing Schedule C.
• Partnerships and multi-member LLCs taxed as partnerships.
• S corporations, on the share of ordinary business income (not the W-2 wages the owner pays themselves).
• Rental real estate that rises to the level of a trade or business, and some trusts and estates.

C corporations do not get it, because they already pay the flat 21 percent corporate rate. Employees do not get it on their wages. If you are a gig worker or contractor paid on a 1099, you almost certainly have qualified business income.

The income thresholds that change everything

Below a taxable-income threshold, the QBI deduction is simple: 20 percent of your qualified business income, with no extra tests. Above it, two limitations can shrink or erase the deduction. Here are the 2025 figures from the IRS.

Taxable income here means your income after the standard or itemized deduction, not your gross revenue. Most freelancers and small operators sit below the threshold and take the clean 20 percent. If your taxable income is above the upper cap, the rules below apply in full; between the two numbers they phase in gradually.

The SSTB rule: when your profession matters

Above the threshold, the type of work you do starts to count. A specified service trade or business (SSTB) is one where the product is essentially your skill or reputation. The tax code lists them: health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage, and investing or investment management. Engineering and architecture are specifically left off the SSTB list, so they keep the deduction.

If you run an SSTB and your taxable income is above the upper cap ($247,300 single or $494,600 married filing jointly for 2025), your QBI deduction drops to zero. Below the threshold it does not matter what your profession is; you get the full 20 percent. The phase-out only bites in the range between the two numbers.

The wage and property limit for everyone else

If your business is not an SSTB but your income is above the threshold, a different cap applies. Your deduction is limited to the greater of:

• 50 percent of the W-2 wages your business pays, or
• 25 percent of W-2 wages plus 2.5 percent of the unadjusted basis of your qualified property (the original cost of business buildings and equipment).

You then take the lesser of 20 percent of QBI or that wage-and-property figure. This is why a high-earning consultant with no employees can lose the deduction while a manufacturer with payroll and equipment keeps it. Below the threshold, none of this applies.

What the 2025 tax law changed

The QBI deduction was scheduled to expire after 2025. The tax law signed in July 2025 made Section 199A permanent and kept the rate at 20 percent. It also added a new floor: starting in 2026, taxpayers with at least $1,000 of qualified business income from a business they materially participate in get a minimum deduction of $400, indexed for inflation afterward. The same law widens the phase-in range for 2026, giving more room before the SSTB and wage limits fully apply. For your 2025 return, the thresholds in the table above are the ones that count.

Where the deduction lands on your return

You do not itemize to claim QBI. It sits below adjusted gross income and comes off whether you take the standard deduction or itemize. You compute it on Form 8995 if your income is at or below the threshold, or the longer Form 8995-A if you are above it or run an SSTB, and the result flows to Form 1040 line 13. Good records make this painless: keep clean books through the year so your net profit is accurate, and if your bookkeeping runs on QuickBooks you can turn a CSV bank export into a QuickBooks file instead of keying transactions in by hand. TaxFile calculates the QBI deduction automatically from your business income and applies the right form.

Frequently asked questions

What is the QBI deduction?

The QBI deduction is a tax break under Section 199A that lets eligible self-employed people and pass-through business owners deduct up to 20 percent of their qualified business income. It reduces taxable income, requires no spending, and is claimed whether or not you itemize. A sole proprietor netting $50,000 could deduct up to $10,000 of it.

Who qualifies for the QBI deduction?

Sole proprietors, partners, S corporation shareholders, and some rental property owners with pass-through business income qualify. C corporations and employees earning wages do not. Below the 2025 taxable-income threshold of $197,300 single or $394,600 married filing jointly, almost all pass-through owners get the full 20 percent with no additional tests.

How much is the QBI deduction worth?

It is worth up to 20 percent of your qualified business income, subject to income limits. For someone with $60,000 of net freelance profit under the threshold, that is a $12,000 deduction, which at a 22 percent marginal rate saves roughly $2,640 in income tax. It does not reduce self-employment tax, only income tax.

What is a specified service trade or business?

An SSTB is a business whose value comes mainly from the owner's skill or reputation: health, law, accounting, consulting, financial services, performing arts, athletics, and similar fields. Below the income threshold, SSTB owners get the full QBI deduction. Above the upper cap ($247,300 single or $494,600 married filing jointly for 2025), the deduction phases out to zero for SSTBs.

Do I have to itemize to claim the QBI deduction?

No. The QBI deduction is separate from itemizing. It comes off after adjusted gross income on Form 1040 line 13, so you can take the standard deduction and the QBI deduction at the same time. You compute it on Form 8995 or Form 8995-A depending on your income level.

TaxFile is self-prepared tax software and does not provide personalized tax advice. QBI rules have limits and exceptions; for a complex situation, consult a CPA or tax professional.