7.7 QBI Deduction (Section 199A)

The Qualified Business Income (QBI) deduction (Section 199A) is one of the most significant tax benefits available to pass-through business owners. The One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, made the QBI deduction PERMANENT — it no longer sunsets after 2025 as originally scheduled under TCJA.

What Is the QBI Deduction?

Section 199A allows eligible taxpayers to deduct up to 20% of qualified business income from domestic businesses operated as:

• Sole proprietorships (Schedule C)
• Partnerships (Form 1065, Schedule K-1)
• S corporations (Form 1120-S, Schedule K-1)
• Trusts and estates (Form 1041)

Important: The QBI deduction does NOT apply to:

• Income from C corporations (taxed at the corporate level)
• Employee wages (W-2 income)
• Investment income (interest, dividends, capital gains)
• Income earned outside the United States

Basic QBI Deduction Calculation

The basic formula is:

QBI Deduction = Lesser of:

1. 20% of Qualified Business Income, OR
2. 20% of Taxable Income (before the QBI deduction, minus net capital gains)

Example: A single taxpayer in 2025 has $80,000 QBI from a sole proprietorship and taxable income (pre-QBI) of $100,000 with no capital gains.

• 20% of QBI = $80,000 × 20% = $16,000
• 20% of Taxable Income = $100,000 × 20% = $20,000
• QBI Deduction = lesser = $16,000

2025 Income Thresholds

For 2025 the thresholds align with the top of the 24% bracket:

Below the Lower Threshold: Simplified calculation — no W-2 wage / UBIA limitation, no SSTB restriction. Full 20% deduction regardless of business type.

Within the Phase-In Range: Limitations begin to apply proportionally.

Above the Upper Threshold: Full W-2 wage / UBIA limitation applies, and SSTBs are completely phased out.

Coming in 2026 (OBBBA): The phase-in range expands to $75,000 Single / $150,000 MFJ, smoothing the transition. The deduction itself is permanent and still 20%.

The W-2 Wage and Capital Limitation

For taxpayers with taxable income above the threshold, the QBI deduction is limited to the greater of:

Option A: 50% of the taxpayer's share of W-2 wages paid by the business

OR

Option B: 25% of W-2 wages PLUS 2.5% of the unadjusted basis immediately after acquisition (UBIA) of qualified property

What is UBIA? Original cost basis of tangible depreciable property used in the business, without reduction for depreciation, Section 179, or bonus depreciation. Property must be held and used in the business during the year and at year-end.

UBIA Recovery Period: Property qualifies until the later of:

• 10 years after placed in service, OR
• End of the last full year of the property's recovery period under §168

Example — W-2 Wage/UBIA Limitation (2025): A single taxpayer with 2025 taxable income of $300,000 (above the $247,300 upper threshold) has:

• QBI of $200,000
• W-2 wages paid: $60,000
• UBIA of qualified property: $400,000

Limitation calculation:

• Option A: 50% × $60,000 = $30,000
• Option B: (25% × $60,000) + (2.5% × $400,000) = $15,000 + $10,000 = $25,000
• Greater of A or B: $30,000
• 20% of QBI: $200,000 × 20% = $40,000
• QBI Deduction: Limited to $30,000

Specified Service Trades or Businesses (SSTBs)

SSTBs face the most restrictive rules.

SSTB Categories:

Important Exclusions: Engineers and architects are specifically excluded from SSTB classification and can claim the full QBI deduction regardless of income.

SSTB Phase-Out Rules for 2025:

• Below $197,300 (single) / $394,600 (MFJ): Full QBI deduction available
• $197,301 – $247,300 (single) / $394,601 – $494,600 (MFJ): Partial deduction (ratably reduced)
• Above $247,300 (single) / $494,600 (MFJ): NO QBI deduction for SSTB income

REIT Dividends and PTP Income Component

The total Section 199A deduction has two components:

1. QBI Component: 20% of QBI from qualified trades or businesses (subject to limitations above)

2. REIT/PTP Component: 20% of qualified REIT dividends and qualified publicly traded partnership (PTP) income

Critical Rules for REIT/PTP Component:

• NOT subject to W-2 wage / UBIA limitations
• NOT subject to SSTB restrictions (except for PTP income from SSTB activities above threshold)
• Qualified REIT dividends and qualified PTP income must be netted together before applying 20%
• A combined REIT/PTP loss carries forward to offset future REIT/PTP income (not QBI)
• REIT dividends reported on Form 1099-DIV, Box 5

Total QBI Deduction Formula:

Total Deduction = QBI Component + REIT/PTP Component
(Capped at 20% of Taxable Income minus Net Capital Gains)

Multiple Business Aggregation

Taxpayers with multiple businesses may aggregate them if certain criteria are met:

• Common ownership (50% or more)
• Same tax year
• Businesses share at least 2 of 3 factors: centralized purchasing, shared administrative services, or shared facilities/employees

Benefits: Combine QBI, W-2 wages, and UBIA across businesses for limitation calculations.

Netting: A business loss reduces QBI from profitable businesses. A negative total QBI carries forward to reduce future QBI.

Claiming the QBI Deduction

Reported on:

• Form 8995 (Simplified) — for taxpayers below threshold amounts
• Form 8995-A (Standard) — for taxpayers above thresholds, SSTBs, or multiple businesses

The deduction flows to Form 1040, Line 13 and reduces taxable income. It is a below-the-line deduction (after AGI) and does not affect AGI.

Looking Ahead — OBBBA Changes Effective 2026

OBBBA made several taxpayer-favorable changes effective starting 2026 (do not apply to 2025 returns):

• Phase-in range expanded from $50K/$100K to $75K/$150K — gives a wider band for partial relief
• $400 minimum QBI deduction for taxpayers with ≥$1,000 QBI — guarantees a small deduction even when wage/UBIA limits would otherwise eliminate the deduction
• QBI deduction is permanent — no longer scheduled to sunset after 2025

EA Exam Tips

Key points:

1. 2025 thresholds: $197,300 / $247,300 (Single); $394,600 / $494,600 (MFJ)
2. QBI is PERMANENT under OBBBA — no 2025 sunset
3. Know the SSTB list — especially health, law, accounting, consulting, financial services
4. Engineers and architects are NOT SSTBs
5. Real estate and insurance brokers are NOT SSTBs
6. 20% of taxable income (minus net capital gains) is the overall cap
7. W-2 wage limitation: 50% of W-2 OR 25% W-2 + 2.5% UBIA (greater of)
8. REIT/PTP component is separate and not subject to W-2/UBIA limits
9. C corporation income and employee wages never qualify
10. 2026 OBBBA changes: wider phase-in ($75K/$150K) and $400 minimum deduction — do NOT apply to 2025 returns