What is the qualified business income deduction? Why it matters & who’s eligible

For many small-business owners, freelancers and real estate investors, tax planning can feel like chasing a moving target, especially when valuable deductions have expiration dates.

For years, the qualified business income (QBI) deduction has been one such tax break. Until recently, it was a temporary tax provision scheduled to expire at the end of 2025.

Now that this tax deduction is permanent and eligibility has expanded, it has become a more dependable part of long‑term tax and business planning. Whether you want to reinvest in your business or save for another financial goal, understanding the QBI deduction can help you make more tax-efficient decisions.

The QBI deduction is a federal tax break that allows eligible pass-through business owners to deduct up to 20% of their qualified business income on their individual tax return, reducing the amount of income subject to federal income taxes.

The QBI deduction was a significant part of the Tax Cuts and Jobs Act (TCJA) of 2017 and was initially set to expire at the end of 2025, but it has been made permanent under the One Big Beautiful Bill Act (OBBBA). That permanence gives business owners and investors more certainty and more opportunity to plan proactively.

It’s important to understand what kinds of income the deduction does and does not apply to. The QBI deduction is based on taxable income (i.e., after expenses), not gross income. It doesn’t apply to:

• Capital gains, dividends or interest income
• Employee wages
• Guaranteed payments to partners
• Reasonable compensation received from an S corporation

The QBI deduction benefits people who have pass-through businesses, where the profits “pass through” to the owners' tax return and are taxed at their ordinary income tax rates. Those rates can range from 10% to 37%, depending on their tax bracket. This includes sole proprietors, partnerships, limited liability companies (LLCs) and S corporations.

The primary goal of the QBI deduction is to level the playing field between owners of pass-through businesses and C corporations, which pay a flat 21% tax rate.

For example, say you are a self-employed consultant with $150,000 in qualified business income after expenses. If you qualify for the full QBI deduction, you can deduct up to $30,000, reducing your taxable income to $120,000. That reduction alone could translate into thousands of dollars in tax savings, depending on your tax bracket.

Paying less in taxes can support entrepreneurship by allowing you to reinvest savings into your business. Or it can help you personally by freeing up cash to build your emergency fund or retirement savings or pay down your debt.

The QBI deduction is available only to taxpayers who earn income from certain pass-through businesses, not from traditional W-2 employment as an employee. In general, you may qualify for the QBI deduction if you earn income from a:

• Sole proprietorship
• Partnership
• LLC (single- or multi-member, as long as you haven’t made an election to be taxed as a C corporation)
• S corporation
• Real estate rental operation (as long as it rises to the level of a trade or business under IRS guidelines)

Section 199A also allows deductions for qualified real estate investment trust (REIT) dividends and for income from publicly traded partnerships, but these are separate categories with different rules. They’re not considered QBI from operating a business.

The amount you can claim may be limited based on your income. For 2026, if your taxable income falls within the expanded phase‑out ranges—$200,000 to $275,000 for single filers or $400,000 to $550,000 for married couples filing jointly—limitations on the QBI deduction begin to apply.

Recent changes under the OBBBA expanded access to the QBI deduction by introducing a guaranteed minimum deduction for qualifying active business owners. If the taxpayer’s aggregate QBI from all active, qualified trades or businesses is at least $1,000, they will receive a minimum deduction of $400 (indexed for inflation after 2026). The taxpayer must materially participate in the business to qualify, though. This rule excludes passive investors and silent partners.

For taxpayers with income above a certain threshold, an exclusion from QBI of income from specified service trades or businesses (SSTBs) phases in. These are trades or businesses where the principal asset is the reputation or skill of one or more employees or owners. Examples of SSTBs include healthcare, law, accounting, consulting, athletics, financial advising and brokerage services.

If your business is an SSTB, your QBI deduction phases out completely once your taxable income exceeds $247,300 ($494,600 if married filing jointly).

The QBI deduction is complex. Between determining whether your business is an SSTB and applying limitations and calculating the deduction, it’s easy to get tripped up by the details. That’s why you have to pay careful attention to the rules or work with a tax professional.

Here are some common mistakes that can reduce your available deduction or eliminate it entirely:

• Misclassifying income as QBI. Not all business income qualifies for the 20% deduction. Capital gains, dividends, interest and other investment earnings are excluded, so don’t include them in your QBI calculations.
• Ignoring wage and capital limitation rules. If your taxable income exceeds the threshold, your deduction may be limited based on W-2 wages paid by the business or the value of depreciable property. Overlooking these limits can lead to overstating your deduction.
• Failing to separate personal and business income. Although you claim the QBI deduction on your individual tax return (Form 1040), it’s based on taxable income from your company—not wages, investment income or distributions from retirement accounts or pensions. Blurring the lines between personal and business finances can distort your qualified business income calculations.
• Improperly aggregating or separating multiple businesses. If you own more than one pass-through business, you might benefit from aggregating them. This allows you to combine income, W-2 wages and the basis of qualified assets to calculate your deduction. However, not all businesses are eligible for aggregation. The same individual or group must directly or indirectly own at least 50% of each aggregated business, and none of the companies can be an SSTB. Misapplying aggregation rules can reduce the available deduction or complicate compliance.

The qualified business income deduction can be useful for reducing your tax liability and improving cash flow, but only if you apply it correctly. The QBI rules are complex and nuanced, so it’s crucial to work with a qualified tax advisor.

A Thrivent financial advisor can collaborate with you and your tax advisor to evaluate your income, entity structure and long-term plans. When you claim the QBI deduction strategically, today’s tax savings can strengthen cash flow and support broader long‑term financial and wealth‑building goals.