The Qualified Business Income (QBI) deduction, created by the US Tax Cuts and Jobs Act under Section 199A, lets eligible owners of pass-through businesses deduct up to 20% of their qualified business income on their personal federal return. It applies to sole proprietors, partnerships, S corporations and many LLCs, but not to income earned as a C corporation.
The deduction reduces taxable income rather than being a credit. Above certain income thresholds, limitations phase in based on W-2 wages paid and the unadjusted basis of qualified property, and specified service trades (SSTBs) such as law or consulting may lose the benefit entirely at high incomes.
Example: a sole proprietor with USD 100,000 of qualified business income and total taxable income below the threshold can deduct 20% = USD 20,000, leaving USD 80,000 subject to federal income tax. In the 24% bracket that deduction is worth roughly USD 4,800 in tax saved.
- Up to 20% of qualified business income
- Pass-through entities only
- Wage and SSTB limits above thresholds
Compare flat-rate approaches such as Italy's forfettario or Portugal's regime simplificado.