Understanding the Qualified Business Income Deduction
The Qualified Business Income (QBI) deduction is a tax break that applies to pass-through businesses, which report profits or losses on individual tax returns. This includes partnerships and S-corporations, along with some trusts and estates. Sole proprietors, such as freelance, contract, and gig economy workers, also qualify. To be eligible, businesses must have a qualified trade or business, which is defined as any trade or business other than a specified service trade or business (SSTB) or an employee.
For 2025, the tax break starts to phase out when taxable income reaches $197,300 for single filers and $394,600 for married taxpayers filing jointly. The deduction can be reduced or eliminated completely, depending on earnings and the type of business. According to the IRS, for tax year 2022, there were roughly 25.6 million QBI deduction claims, up from 18.7 million in 2018, the first year of the tax break.
However, the deduction has been controversial because “most of the benefits flow to taxpayers with a lot of income,” said Erica York, vice president of federal tax policy with the Tax Foundation’s Center for Federal Tax Policy. “These are not taxpayers who work a W-2 job and earn a salary,” she said. “They’re business owners who receive business profits on their individual tax returns.”
Proposed Changes to the QBI Deduction
Currently, certain white-collar professionals — doctors, lawyers, accountants, financial advisors, and others — known as a “specified service trade or business,” or SSTB, can’t claim the QBI deduction once income exceeds certain limits. There’s also an income phase-out for non-SSTB businesses, but that doesn’t go to zero.
The House bill would change the phase-out calculation, which could provide a bigger tax break for certain SSTB owners, said certified financial planner and enrolled agent Ben Henry-Moreland, senior financial planning nerd for advisor platform Kitces.com, who analyzed the bill. If enacted, the higher 23% deduction could offer “some [tax] benefit” for all income levels, but the phase-out changes would primarily benefit higher-income SSTB owners.
According to Chye-Ching Huang, executive director of the Tax Law Center at New York University Law, the House proposed QBI deduction changes would be “more generous and more valuable to higher-income people, especially those in certain industries including lawyers and lobbyists.”
Smart Tip for Readers
To determine if you have qualified business income, review your business structure and income level to see if you meet the eligibility criteria, and consider consulting a tax professional to ensure you’re taking advantage of the available tax breaks. For more information on the QBI deduction and proposed changes, visit Here
