Why You Should Care About the Qualified Business Income (QBI) Deduction

Why You Should Care About the Qualified Business Income (QBI) Deduction

The Qualified Business Income (QBI) deduction is one of the most valuable—and misunderstood—tax breaks available to business owners. Introduced as part of the 2017 Tax Cuts and Jobs Act, it allows eligible entrepreneurs to deduct up to 20% of their qualified business income from their taxable income. For many small business owners, this can result in thousands of dollars in annual tax savings—but only if you understand how it works and how to qualify.

So, what is QBI? In simple terms, it’s the net income your business earns—after expenses—but before taxes. If you operate as a sole proprietor, partnership, S corporation, or LLC taxed as one of these, you may qualify. C corporations do not qualify. The deduction applies to domestic income from qualified trades or businesses, and it’s taken on your personal return, not at the business level.

For example, if your business earns $100,000 in qualified business income and you qualify for the full 20% deduction, that’s $20,000 off your taxable income. It doesn’t reduce your self-employment tax, but it does significantly lower the income taxes you owe.

However, like most things in the tax code, there are caveats. Once your income exceeds certain thresholds—$191,950 for single filers and $383,900 for joint filers in 2024—the rules become more complex. If you're over the limit, restrictions apply based on your business type, wages paid to employees, and qualified property owned. In particular, “specified service trades or businesses” (like lawyers, consultants, financial advisors, and doctors) may see the deduction phased out or eliminated once income passes these thresholds.

This is where strategic tax planning becomes crucial. You may be able to optimize your salary vs. distributions, invest in depreciable property, or change your business structure to increase your eligible deduction. Sometimes, even contributing to a retirement plan or accelerating business expenses can lower your income enough to preserve the full benefit.

Bottom line: If you're running a pass-through business, the QBI deduction could be one of your biggest opportunities to reduce your tax bill—but only if you plan ahead. Don’t leave money on the table simply because the rules are complex. Work with your CPA to calculate your eligibility and explore ways to maximize this powerful deduction. In the right hands, QBI isn’t just an acronym—it’s a key to bigger savings and stronger profits.

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