Tax glossary

Qualified Business Income (QBI) Deduction

Qualified Business Income Deduction — what it means, how it works, and a real example, explained without the jargon.

What is Qualified Business Income (QBI) Deduction?

The QBI deduction lets many pass-through owners deduct up to 20% of their qualified business income before it's taxed.

How it works

If you run a sole proprietorship, partnership, or S corp, you may deduct 20% of the business's qualified profit right off your taxable income. Above certain income thresholds, limits kick in — especially for service businesses like law, medicine, and consulting.

A quick example

A freelancer with $80,000 of qualified business income can deduct $16,000, so only $64,000 of that profit gets taxed.

What people get wrong

The phase-out rules for high earners and "specified service" businesses are genuinely complex. If your income is near the threshold, this is one place where professional help usually pays for itself.

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Frequently asked questions

What does Qualified Business Income Deduction mean?

The QBI deduction lets many pass-through owners deduct up to 20% of their qualified business income before it's taxed.

How does Qualified Business Income Deduction work?

If you run a sole proprietorship, partnership, or S corp, you may deduct 20% of the business's qualified profit right off your taxable income. Above certain income thresholds, limits kick in — especially for service businesses like law, medicine, and consulting.

What's the most common mistake with qualified business income deduction?

The phase-out rules for high earners and "specified service" businesses are genuinely complex. If your income is near the threshold, this is one place where professional help usually pays for itself.