How to Calculate QBI: Claim Your 20% Deduction

The Qualified Business Income (QBI) deduction, also known as the Section 199A deduction, is one of the most valuable tax breaks available to small business owners and self-employed individuals. Introduced under the Tax Cuts and Jobs Act of 2017, it allows eligible taxpayers to deduct up to 20% of their QBI component, reducing taxable income and potentially saving thousands each tax year.

But calculating QBI is not always simple. Rules vary depending on income level, entity type, and whether you’re in a specified service trade or business. Mistakes can lead to missed savings—or worse, penalties and IRS scrutiny.

This guide breaks down how to calculate your deduction, explains key thresholds, and shares strategies to maximize this deduction while maintaining compliance.

Key Highlights

• Eligible businesses can deduct up to 20% of qualified business income, but exclusions apply.

• Income thresholds determine whether your calculation is straightforward or subject to complex limits.

• Higher earners face W-2, Wage and Tax Statement wage and property tests, plus stricter rules for service businesses.

• Strategic planning—like entity choice, payroll setup, and aggregation—can increase your deduction.

• Professional bookkeeping and tax advisory help ensure accurate calculations and audit protection.

Understanding the Fundamentals of the QBI Calculation

Defining Qualified Business Income (QBI)

QBI is generally the net income from a qualified trade or business, including gains, deductions, and losses. However, some items do not count, such as:

• Wages earned as an employee

• Reasonable compensation paid to S corp owners

• Guaranteed payments to partners

• Certain investment income (capital gains, dividends, interest not related to business operations)

Accurate bookkeeping is an essential part of claiming the full deduction amount. If income and expenses aren’t properly categorized, your QBI base will be inaccurate, which can lead to several issues. 1-800Accountant’s full-service bookkeeping solution ensures your records are clean and audit-ready throughout the year. 

The Overall Deduction Limitation

Even with accurate QBI, the deduction cannot exceed 20% of your taxable income (minus net capital gains). For taxpayers with large capital gains, this limitation can reduce the overall deduction.

How to Navigate Income Thresholds

Income thresholds determine whether your calculation is simple or requires additional steps. For 2025, the thresholds are:

• Single filers: $197,300

• Married filing jointly: $394,600

Calculation for taxpayers below the threshold

If your income is under the limit, the calculation is simple:

QBI deduction = QBI × 20%

No further restrictions apply.

Calculation for taxpayers above the threshold

For those exceeding the threshold, two sets of limitations apply:

1. W-2 wage and qualified property limits

2. Specified Service Trade or Business (SSTB) restrictions

Expert tax planning becomes crucial at this stage in your QBI calculation. Services, like 1-800Accountant's year-round business tax advisory, ensure you meet IRS requirements while maximizing savings.

A Deep Dive into the W-2 Wage and Qualified Property Limitation

For higher earners, the QBI deduction is limited to the greater of the results of the following tests. 

Test 1: 50% of W-2 Wages

Test 1 includes wages paid by the business to employees, including the owner’s reasonable salary in an S corp.

Test 2: 25% of W-2 wages plus 2.5% of unadjusted basis immediately after acquisition (UBIA) of qualified property

Qualified property includes depreciable assets like equipment and real estate. The unadjusted basis immediately after acquisition (UBIA) is used for test 2.

The Critical Role of Payroll and Asset Management

Accurate payroll reporting is vital, especially if wages are the limiting factor in your QBI deduction. 1-800Accountant’s payroll service ensures W-2 wages are properly managed and reported, preserving your eligibility.

Similarly, asset tracking systems and bookkeeping are needed to generate correct UBIA calculations.

The Specified Service Trade or Business (SSTB) Challenge

SSTBs face the most stringent limitations, which are designed to restrict the deduction for certain professional services.

Identifying an SSTB

These fields face SSTB restrictions: 

• Health

• Law

• Accounting

• Consulting

• Financial services

The "reputation or skill" clause is an important concept that often requires professional interpretation. This clause applies to businesses where the principal asset is the reputation or skill of one or more of its employees or owners.

How the SSTB limitation works

Above the income threshold, SSTB owners see their deduction phase-out and elimination at higher levels.

Professional tax advisory can help SSTB owners manage income strategically, potentially preserving some deduction eligibility.

Advanced Planning: Moving from Calculation to Strategy

Optimizing Your Business Structure for QBI

Entity choice has a direct impact on many aspects of your business, including the QBI deduction. For example, electing S corporation status allows owners working in the business to pay themselves a reasonable salary, which then contributes to W-2 wages.

1-800Accountant's entity formation service ensures your structure is set up for maximum efficiency from the start.

Strategic Aggregation for Multiple Businesses

Taxpayers with multiple businesses may be able to aggregate them for a more favorable outcome. The rules are strict, requiring professional analysis. An experienced accounting team can determine if aggregation is beneficial for your operations.

The Future of QBI and Why Staying Informed Matters

Originally set to expire after 2025, the QBI deduction has been made permanent by the passage of the recent One Big Beautiful Bill legislation. 

Many tax laws and rules impacting your business change periodically, making partnering with a knowledgeable CPA essential, as it ensures you can maximize and never miss opportunities as the rules evolve.

Maintain Accurate, Audit-Ready Books to Maximize Savings with Professional Support

QBI rules are intricate and complex, and can impact your business positively if you get them right, and negatively if mistakes are made. The IRS often reviews large tax deductions, which emphasizes the need for accurate bookkeeping. Poor recordkeeping practices can put your business at risk.

It's beneficial to work with a CPA or accounting team that understands the nuances of your specific region and industry, and can apply QBI rules effectively. The goal is not just to file a return, but to build a year-round strategy that minimizes your business tax liability.

And with audit defense, you gain peace of mind and ensure an expert is ready to guide your business if questions arise.

Unlock Your QBI Deduction Potential with 1-800Accountant

The QBI deduction is a powerful opportunity, but only if calculated correctly. From payroll to bookkeeping, entity selection to tax strategy, every detail matters.

Adjusting depreciation, timing income and expenses, managing owner compensation, and other proven strategies can influence the final total QBI deduction calculation. This is where the tax professionals at 1-800Accountant, America's leading virtual accounting firm, can make a difference. A key advantage of working with us is the year-round support from your designated accountant or team, who understands your business's unique needs and challenges..

Schedule a free 30-minute business consultation to see how our dedicated team can ensure you claim the maximum deduction while building a smarter long-term tax plan.

Qualified Business Income Deduction FAQs

Who is eligible for the QBI deduction?

Most pass-through entities, also called pass-through businesses, including sole proprietorships, partnerships, and S corps, may qualify for the QBI deduction. C corporations do not.

What happens if you calculate QBI deduction incorrectly?

QBI calculation errors can result in underclaimed savings—or IRS federal tax penalties if the net amount is overstated.

Can you claim this deduction retroactively after filing?

Amended returns may allow for retroactive QBI deduction claims if you were eligible but didn’t initially claim this deduction.

How can you identify if you’re classified as part of SSTB?

Fields like law, health, consulting, and financial services are considered SSTBs. If you're unsure of your business's SSTB status, seek professional guidance.

On which forms do you report QBI?

You would typically report QBI via IRS Form 8995, Qualified Business Income Deduction Simplified Computation, or IRS Form 8995-A, Qualified Business Income Deduction, and attach it to your IRS Form 1040, U.S. Individual Income Tax Return.

What are common errors to avoid?

Misclassifying income, failing to track UBIA, and overlooking wage reporting are common mistakes you should avoid.

Should married people file together or separately to maximize savings?

In many cases, joint filing maximizes savings by doubling thresholds.

Would hiring employees instead of independent contractors increase savings?

Yes, employees generate W-2 wages that can help raise your deduction under the wage income limitation tests.