Advertiser Disclosure

Qualified Business Income Deduction (QBI): What It Is & Who Qualifies

The qualified business income deduction is for self-employed people and small-business owners. It can be easy to qualify — if you know the rules.
Nov. 13, 2020
Income Taxes, Small Business, Small Business Taxes, Taxes
What Is the Qualified Business Income Deduction and What Pass-Through Income Qualifies?
Many or all of the products featured here are from our partners who compensate us. This may influence which products we write about and where and how the product appears on a page. However, this does not influence our evaluations. Our opinions are our own.

What is the qualified business income deduction?

The qualified business income deduction (QBI) is a tax deduction that allows eligible self-employed and small-business owners to deduct up to 20% of their qualified business income on their taxes.

In general, total taxable income in 2020 must be under $163,300 for single filers or $326,600 for joint filers to qualify. In 2021, the limits rise to $164,900 for single filers and $329,800 for joint filers.

If you’re over that limit, complicated IRS rules determine whether your business income qualifies for a full or partial deduction.

Here’s how the qualified business income deduction generally works.

Who qualifies for the qualified business income deduction?

The qualified business income deduction is for people who have “pass-through income” — that’s business income that you report on your personal tax return.

Entities eligible for the qualified business income deduction include:

  • Sole proprietorship
  • Partnerships.
  • S corporations.
  • Limited liability companies (LLCs).

» MORE: See our guide to filing taxes as a freelancer

You must have “qualified business income”

The qualified business income deduction by definition applies to “qualified business income,” or QBI. Qualified business income is defined as “the net amount of qualified items of income, gain, deduction and loss with respect to any trade or business.” Broadly speaking, that means your business’s net profit.

But it also means that not all business income qualifies. QBI excludes:

Your income level matters

If your total taxable income — that is, not just your business income but other income as well — is at or below $163,300 for single filers or $326,600 for joint filers, then in 2020 you may qualify for the 20% deduction on your taxable business income.  In 2021, the limits rise to $164,900 for single filers and $329,800 for joint filers.

↓ Jump down to learn just how the deduction works

But if your income is above these limits, now’s the time to reach for a bottle of aspirin.

Here’s why: Above those income limits, your ability to claim the pass-through deduction depends on the precise nature of your business. And even if your business qualifies, there’s a chance you won’t get to enjoy the full 20% tax break, as the qualified business income deduction is phased out for some businesses.

See what else you can do for your business


If you’re over the income limit

If you’re over the income limit, there are a few tests that determine whether you qualify for the qualified business income deduction. One such test is this: Is your business a “specified service trade or business”?

If you’re a doctor, lawyer, consultant, actor, financial planner — and the list goes on — then your business is deemed a “specified service trade or business,” and many high earners in these fields won’t qualify for this tax break, because it disappears once you hit total taxable income of $213,300 if you’re single, and $426,600 if you’re married filing jointly.


This form will put you in touch with an advisor at Facet Wealth, a fee-only, fiduciary online planning firm. They aren’t tax preparers, but they can help you with tax and estate planning.

Working with a CFP is easier than ever before

Facet Wealth, an award-winning next-generation financial planning service, matches you with a CFP® professional so you can get the reliable, high-quality financial advice you need.

Complete the form below and NerdWallet will share your information with Facet Wealth so they can contact you.

By supplying your phone number above and clicking the “Take the first step“ button, you are agreeing that Facet Wealth and NerdWallet may call or text you about financial planning services at the phone number provided above using an automatic dialing system, even if your phone number appears on a state or national Do Not Call Registry or List. Your consent to receive calls/texts is not a condition of purchase.

Powered by


Get excited!
You're taking a step towards owning your financial future.

You are being referred to Facet Wealth, INC.’s website ("Facet Wealth") by NerdWallet, Inc., a solicitor of Facet Wealth ("Solicitor"). The Solicitor that is directing you to this webpage will receive compensation from Facet Wealth if you enter into an advisory relationship or into a paying subscription for advisory services. Compensation to the Solicitor may be up to $1,500. You will not be charged any fee or incur any additional costs for being referred to Facet Wealth by the Solicitor. The Solicitor may promote and/or may advertise Facet Wealth’s investment adviser services and may offer independent analysis and reviews of Facet Wealth’s services. Facet Wealth and the Solicitor are not under common ownership or otherwise related entities.Additional information about Facet Wealth is contained in its Form ADV Part 2A available here.

Tests for pass-through businesses over the income limit

  • If your business is a “specified service trade or business” in 2020 and your income is from $163,300 to $213,300 (single filers) or from $326,600 to $426,600 (joint filers), there are some tests to determine whether you can claim the qualified business income deduction, and, if so, whether it’ll be reduced.
  • The same goes if you own a business with pass-through income that’s not a “specified trade or business”: There are tests that determine how much you can claim of the deduction.
  • Specifically, the amount of your deduction is based on a calculation tied to the amount of wages you paid to employees (including yourself), as well as the value of the property the business owns. The higher those figures, the better your chances of being able to qualify for the deduction.
  • But it gets complicated, and fast. So if your tax situation falls into this area, now might be a good time to consult a tax professional. Or check out the IRS regulations for more details.

» MORE: See some other big tax deductions for the self-employed

How the qualified business income deduction works

There are a couple of aspects of the pass-through deduction to keep in mind:

1. There are actually two 20% figures. The qualified business income deduction is worth up to 20% of your taxable business income. But it’s also true that when claiming this pass-through deduction, it can’t add up to more than 20% of your total taxable income.

Here’s how it works: You figure your business income and expenses on Schedule C, as normal. And you figure your adjusted gross income on Form 1040, as usual. Only after that do you start calculating this pass-through deduction.

2,. You can claim the qualified business income deduction even if you don’t itemize. That is, if you use the standard deduction, this deduction is still available to you. (Here’s how much the standard deduction is worth this year.)

About the authors