The qualified business income deduction, also known as the “20% pass-through deduction,” is a tax deduction for business owners who earn income from a pass-through entity. 

This includes sole proprietorships, partnerships, S corporations, and certain trusts and estates. The deduction allows business owners to deduct up to 20% of their qualified business income (QBI), resulting in a lower taxable income. 

The qualified business income deduction was created by the Tax Cuts and Jobs Act of 2017 and is available for tax years 2018 through 2025. After 2025, the deduction may be renewed or made permanent by Congress. 

How the Qualified Business Income Deduction Works 

In order to claim the deduction, you must first calculate your QBI. QBI is defined as net income from your trade or business, excluding certain investment-related income, such as interest, dividends, and capital gains. Once you have calculated your QBI, you can deduct up to 20% of that amount on your taxes. 

There are some limitations on the qualified business income deduction. First, if your taxable income exceeds certain thresholds—$315,000 for married couples filing jointly or $157,500 for all other taxpayers—your deduction may be limited. Additionally, if you work in one of the specified service trades or businesses—such as health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services—you may not be eligible for the full deduction. 

Qualified business income also does not include any wages paid to employees or guaranteed payments to partners. However, it does include pass-through income from real estate investment trusts (REITs) and publicly traded partnerships (PTPs). 

The qualified business income deduction is a valuable tax break for small business owners and entrepreneurs. If you earn pass-through income from a sole proprietorship, partnership, S corporation or trust/estate, you may be eligible to deduct up to 20% of your qualified business income on your taxes. There are some limitations on the deduction—such as annual taxable income thresholds and restrictions for service businesses—but overall it can provide significant tax savings for eligible taxpayers. Talk to your accountant or tax preparer to see if you qualify for the deduction and how much you can save come tax time!