If you own a business that passes its income through to your personal return — a sole proprietorship, a partnership, or an S corporation — there is a deduction that can shave up to a fifth off the business income you pay tax on. The qualified business income (QBI) deduction under Code Section 199A is one of the most valuable breaks available to pass-through owners, and thanks to the 2025 tax law it is now a permanent fixture rather than a provision set to expire.
This is general information, not individual tax advice — the right treatment depends on your specific situation.
What the 20% Deduction Is
Section 199A generally lets eligible owners deduct up to 20% of their qualified business income — the net income from a qualifying trade or business. Qualified business income does not include items like capital gains, dividends, or interest income, and it does not include reasonable compensation an S corporation pays you or guaranteed payments from a partnership. The deduction is also limited to 20% of your taxable income above net capital gains, so the two calculations work together.
Who Qualifies
The deduction is for owners of pass-through entities: sole proprietors filing Schedule C, partners in partnerships, S corporation shareholders, and some trusts and estates. C corporations do not qualify — they already received a separate rate cut. Most owners whose taxable income sits below the annual threshold qualify for the full 20% with very few strings attached, which is the simplest and most common case.
The Income Thresholds
Everything hinges on your taxable income. For the 2025 tax year, the thresholds are $197,300 for single filers and $394,600 for married couples filing jointly. Below the threshold, you generally take the full 20% deduction regardless of what kind of business you run or how much you pay in wages. Above it, additional limits phase in, and the calculation gets considerably more involved. These figures are adjusted annually, so the current-year numbers are what matter at filing time.
The Wage and UBIA Limit
Once your taxable income rises above the threshold, the deduction is capped by a W-2 wage and property test. In that range, your QBI deduction for a business cannot exceed the greater of 50% of the W-2 wages the business paid, or 25% of those wages plus 2.5% of the unadjusted basis (UBIA) of its qualified property. This is why high-income owners of capital-light service firms — who may pay themselves through distributions rather than heavy payroll — can see the deduction shrink or disappear.
The SSTB Phase-Out
A second limit targets the specified service trade or business (SSTB) — fields such as health, law, accounting, consulting, financial services, and any business whose principal asset is the reputation or skill of its owners. Below the income threshold, an SSTB gets the full deduction like any other business. Within the phase-out range above the threshold, the deduction is gradually reduced, and once income clears the top of the range — $247,300 single or $494,600 joint for 2025 — an SSTB owner gets no QBI deduction at all. Non-service businesses never face this SSTB cutoff, only the wage/UBIA limit.
A Below-the-Line Break — and Now Permanent
The QBI deduction is taken below the line: it reduces your taxable income, but it does not reduce your adjusted gross income, and — importantly — it does not reduce self-employment tax. A sole proprietor still owes SE tax on the full net earnings; the 20% only cuts the income-tax side. You can claim it whether or not you itemize. The 2025 tax law (the One Big Beautiful Bill Act) made Section 199A permanent and modestly widened the phase-in ranges going forward, so this is a deduction worth planning around for the long haul rather than treating as temporary.
How VarStan Helps
The QBI deduction rewards planning: reasonable S-corp wage levels, entity choice, and even the timing of income can all swing how much of the 20% you actually keep, especially as your income approaches the thresholds. As a CPA-led firm, we model the wage and SSTB limits against your real numbers, keep the calculation current as the thresholds move each year, and make sure the deduction is claimed correctly on your return. If your income is climbing toward the threshold — or you are weighing an S-corp election — a short conversation can show you exactly what the deduction is worth to you.
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