Qualified Business Income (QBI)

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.


Limitation 2 & 3 – applies to high-income taxpayers, those who (before QBI deduction) have taxable income of $364,200 (for 2023) for married taxpayers filing jointly and $182,100 (for 2023) for single and head-of-household taxpayers in 2021.

If above thresholds are reached, § 199A imposes two independent limitations.

  • The QBI deduction is capped based on the percentage of the W–2 wages paid by the business (i.e., wages paid to its employees) or based on a smaller percentage of W–2 wages paid by the business and a percentage of the cost of its depreciable property used to produce QBI.
  • The QBI deduction generally is not available for income earned from “specified service” businesses. “Specified service” businesses include doctors, dentists, lawyers, accountants, consultants, investment advisers, entertainers, and athletes (among others), but not engineers and architects.