Paragraph 199A permits an individual to deduct 20 percent of the qualified business income generated through a sole proprietorship, a partnership, or an S corporation. In general, the deduction for qualified business income is the lesser of:
- 20 percent of qualified business income (QBI), or
- 20 percent of taxpayer modified taxable income.
There are three limitations on the QBI deduction:
- Limitation 1 — based on modified taxable income,
- Limitation 2 — applies to high-income taxpayers,
- Limitation 3 — applies to certain types of services businesses.
Limitation 1 – modified taxable income is taxable income before the deduction for qualified business income, reduced by any net capital gain and any qualified dividend income. In general, if you income is below ~$383,900 (MFJ) or $191,950 (Single) you will get full QBI deduction.
Limitation 2 & 3 – applies to high-income taxpayers, those who (before QBI deduction) have taxable income of $383,900 (for 2025) for married taxpayers filing jointly and $191,950 (for 2025) for single and head-of-household taxpayers in 20215
If above thresholds are reached, § 199A imposes two independent limitations.
- The QBI deduction is capped to 50% of total W–2 wages paid by the business (i.e., wages paid to its employees) or 2.5% of the cost of its depreciable property used to produce QBI.
- The QBI deduction generally is not available for income exceeding $383,900 (MFJ) or $191,950 (Single) earned from “specified service” businesses. “Specified service” businesses include doctors, dentists, lawyers, accountants, consultants, investment advisers, entertainers, authors, artists and athletes (among others), but not engineers and architects.