**Qualified Business Income (QBI) deduction** (IRC Section 199A, enacted 2018 TCJA): **What it is**: Up to **20% deduction** on qualified business income from pass-through entities (sole proprietorships, S-corporations, partnerships, LLCs taxed as pass-throughs). **Not** available to C-corporations (they benefit from 21% corporate rate instead). **Example**: $100,000 QBI from sole proprietorship → **$20,000 deduction** (if all requirements met) → Saves $4,400-$7,400 tax (22-37% bracket). **Who qualifies (2025 income thresholds)**: **Full 20% deduction** (no limitations): **Single filers**: Taxable income ≤ **$191,950**. **Married filing jointly**: Taxable income ≤ **$383,900**. **Any business type** (including SSTB, specified service trades). **Partial limitation** (phase-in range): **Single**: $191,950 - $241,950 (50k range). **Married**: $383,900 - $483,900 ($100k range). **Limitation applies**: W-2 wage limit and/or UBIA limit phased in (calculation complex). **Above threshold** (full limitations): **Single**: >$241,950. **Married**: >$483,900. **Non-SSTB**: QBI limited to greater of (a) 50% of W-2 wages, OR (b) 25% of W-2 wages + 2.5% of UBIA (unadjusted basis of qualified property). **SSTB**: **No QBI deduction** (fully phased out, $0 allowed). **Qualifying income types**: ✅ **QBI includes**: Net profit from Schedule C (sole proprietor).

Distributive share from partnership/LLC (K-1 income).

S-corp ordinary business income (not shareholder wages).

Rental real estate (if rise to trade/business level, not passive). ❌ **Not QBI**: W-2 wages (even from own S-corp).

Capital gains/losses.

Interest/dividend income (except REIT/PTP).

Guaranteed payments to partners.

Reasonable compensation to S-corp shareholders. **SSTB definition** (Specified Service Trade or Business, restricted above threshold): Health, law, accounting, actuarial, performing arts, consulting, athletics, financial/brokerage services, investing/trading. **De minimis rule**: If <10% of gross receipts from SSTB activity, entire business treated as non-SSTB. **Example eligibility scenarios**: **Scenario 1**: Single CPA, $150k QBI, $180k taxable income → **Full $30k deduction** (20% × $150k).

Below $191,950 threshold, SSTB restriction doesn't apply. **Scenario 2**: Married plumber, $400k QBI, $450k taxable income → **Subject to W-2 wage limit** (above $383,900 but non-SSTB).

If W-2 wages $150k → Limit = 50% × $150k = $75k.

QBI × 20% = $80k → **Deduction capped at $75k** (W-2 wage limit). **Scenario 3**: Single lawyer, $300k QBI, $350k taxable income → **$0 deduction** (SSTB above $241,950 threshold, fully phased out).

**W-2 wage limitation** (applies to high-income taxpayers above threshold): **Two alternative calculations** (taxpayer chooses greater): **Option A**: **50% of W-2 wages** paid by business. **Option B**: **25% of W-2 wages + 2.5% of UBIA** (unadjusted basis immediately after acquisition of qualified property). **Example calculation** ($500k QBI, $600k taxable income, married): **Step 1**: Taxable income $600k > $483,900 threshold → **Full W-2/UBIA limitation applies**. **Step 2**: Calculate tentative QBI deduction: 20% × $500k = **$100,000** (before limitation). **Step 3**: W-2 wages paid: $200,000 (to employees, not owner). **Option A**: 50% × $200k = **$100,000**. **Option B**: 25% × $200k + 2.5% × UBIA. **Assume** UBIA = $800,000 (machinery, equipment, buildings). 25% × $200k = $50k. 2.5% × $800k = $20k. **Total Option B**: $50k + $20k = **$70,000**. **Step 4**: Choose greater: $100k (Option A) vs $70k (Option B) → **$100,000** (Option A wins). **Step 5**: Final QBI deduction = **Lesser of**: Tentative QBI ($100k) OR W-2 limit ($100k) = **$100,000** (both equal, fully allowed). **Tax savings**: $100k × 37% (top bracket) = **$37,000** saved. **Scenario where UBIA helps** (low W-2 wages, capital-intensive business): **Example**: Real estate rental business (non-SSTB).

QBI: $300,000.

W-2 wages: $40,000 (property manager salaries).

UBIA: $4,000,000 (rental buildings, excluding land).

Taxable income: $550,000 (married, above threshold). **Calculation**: Tentative QBI: 20% × $300k = **$60,000**. **Option A**: 50% × $40k = **$20,000** (very low, hurts deduction). **Option B**: 25% × $40k + 2.5% × $4M = $10k + $100k = **$110,000** (UBIA saves the day). **Final deduction**: Lesser of $60k (tentative) vs $110k (limit) = **$60,000** (full deduction allowed thanks to UBIA). **Without UBIA option**: Deduction capped at $20k (Option A only) → **Lost $40k deduction** = $14,800 extra tax (37% bracket). **UBIA definition** (Unadjusted Basis Immediately After Acquisition): **Includes**: Depreciable property (buildings, machinery, equipment, vehicles). **Cost basis** at time of purchase (before depreciation adjustments).

Held and used in business at close of tax year.

Depreciable period hasn't ended (still in MACRS schedule). **Excludes**: Land (not depreciable).

Property held <10 years (if sold, no longer qualified).

Fully depreciated property. **Example UBIA calculation**: Purchased machinery: $500,000 (Jan 2020).

Accumulated depreciation (5 years): $300,000. **Adjusted basis** (2025): $200,000. **UBIA** (for QBI): **$500,000** (original cost, ignore depreciation). **Phase-in calculation** (partial limitation, within threshold range): **Example**: Single, $210,000 taxable income (within $191,950-$241,950 phase-in). **Phase-in %**: ($241,950 - $210,000) ÷ $50,000 = **63.9%** (deduction NOT phased in). **Limitation phased in**: 100% - 63.9% = **36.1%** (limitation applies 36.1%). **If** QBI deduction = $50k (tentative) but W-2 limit = $30k. **Reduction**: ($50k - $30k) × 36.1% = $7,222 reduction. **Final deduction**: $50k - $7,222 = **$42,778**.

**SSTB definition** (IRC Section 199A(d)(2), restricted businesses): **13 specified service fields**: (1) **Health**: Doctors, dentists, nurses, veterinarians, pharmacists, physical therapists. (2) **Law**: Attorneys, paralegals, legal services. (3) **Accounting**: CPAs, bookkeepers, tax preparers, auditors. (4) **Actuarial science**: Actuaries, pension consultants. (5) **Performing arts**: Actors, musicians, directors, entertainers. (6) **Consulting**: Management consultants, IT consultants, strategy advisors. (7) **Athletics**: Professional athletes, coaches, sports teams. (8) **Financial services**: Financial advisors, investment bankers, brokers, wealth managers. (9) **Brokerage services**: Real estate agents, insurance brokers, stock brokers. (10) **Investing/investment management**: Hedge fund managers, private equity, venture capital. (11) **Trading**: Securities, commodities, partnership interests. (12) **Dealing in securities**: Market makers, dealers. (13) **Principal asset = reputation/skill** of employees/owners (catch-all for celebrity endorsements, influencers). **SSTB restrictions** (income-based phase-out): **Below threshold**: **Single <$191,950** OR **Married <$383,900** → **Full 20% QBI deduction** (SSTB treated same as non-SSTB). **Within phase-in range**: **Single $191,950-$241,950** OR **Married $383,900-$483,900** → **Partial QBI deduction** (phased out proportionally). **Above threshold**: **Single >$241,950** OR **Married >$483,900** → **$0 QBI deduction** for SSTB income (fully disallowed). **Example scenarios**: **Scenario 1**: Single doctor, $150k QBI, $180k taxable income. **Status**: SSTB (health), but below $191,950 threshold. **QBI deduction**: 20% × $150k = **$30,000** (full deduction allowed). **Scenario 2**: Married CPA couple, $400k QBI, $450k taxable income. **Status**: SSTB (accounting), within $383,900-$483,900 phase-in. **Phase-in %**: ($483,900 - $450k) ÷ $100k = **33.9%** (deduction NOT phased out). **Phase-out %**: 100% - 33.9% = **66.1%** (deduction phased out 66.1%). **Tentative QBI**: 20% × $400k = $80,000. **Reduction**: $80k × 66.1% = $52,880 disallowed. **Final QBI deduction**: $80k - $52,880 = **$27,120** (33.9% of full deduction). **Scenario 3**: Single lawyer, $500k QBI, $600k taxable income. **Status**: SSTB (law), above $241,950 threshold. **QBI deduction**: **$0** (fully phased out, no deduction). **SSTB vs non-SSTB combination** (mixed income): **Example**: Married taxpayer, $550k taxable income (above threshold). **Income source 1**: SSTB law practice, $300k QBI → **$0 deduction** (phased out). **Income source 2**: Non-SSTB rental real estate, $200k QBI → Subject to W-2/UBIA limit. **W-2 wages** (rental): $50k. **UBIA**: $3M (buildings). **Calculation**: Tentative QBI: 20% × $200k = $40,000.

W-2 limit Option A: 50% × $50k = $25,000.

Option B: 25% × $50k + 2.5% × $3M = $12.5k + $75k = $87,500. **Greater**: $87,500 (Option B). **Final non-SSTB deduction**: Lesser of $40k vs $87.5k = **$40,000**. **Total QBI deduction**: SSTB $0 + Non-SSTB $40k = **$40,000**. **Tax savings**: $40k × 37% = $14,800. **De minimis SSTB exception**: If business has **<10% gross receipts** from SSTB activity → **Entire business treated as non-SSTB**. **Example**: Engineering firm (non-SSTB).

Occasional consulting services (SSTB).

Gross receipts: $1M total, $80k consulting (8% of total). **Result**: 8% < 10% threshold → **Full business treated as non-SSTB** → No SSTB restriction applies (even above income threshold). **Strategic planning**: **Separate SSTB from non-SSTB**: Lawyer sets up separate LLC for rental properties → Rental income avoids SSTB taint. **W-2 wage optimization**: Pay reasonable W-2 wages to yourself/employees (S-corp) → Increase W-2 wage limit for non-SSTB income. **Income timing**: If near threshold, defer income to next year or accelerate deductions to stay below phase-in range.

**Yes, QBI from multiple qualified businesses can be combined** (IRC Section 199A(b)(1)): **Basic rule** (without aggregation election): Calculate QBI deduction separately for each trade/business.

Combine positive QBI from all businesses.

Offset with negative QBI from loss businesses (QBI can be negative).

Apply overall taxable income limitation (20% of taxable income less net capital gains). **Example** (3 businesses, no aggregation): **Business 1** (consulting): $200k QBI, $100k W-2 wages.

Tentative QBI deduction: 20% × $200k = $40,000.

W-2 limit: 50% × $100k = $50,000. **Allowed**: $40,000 (lesser of $40k vs $50k). **Business 2** (rental real estate): $150k QBI, $20k W-2 wages, $2M UBIA.

Tentative QBI: 20% × $150k = $30,000.

W-2/UBIA limit: 25% × $20k + 2.5% × $2M = $5k + $50k = $55,000. **Allowed**: $30,000. **Business 3** (side hustle, loss): -$50k QBI. **Combined QBI**: $200k + $150k - $50k = **$300k**. **Total tentative deduction**: $40k + $30k + $0 (loss business contributes $0) = **$70,000**. **Final check**: Combined deduction $70k vs 20% of taxable income (assume $400k) = $80k → **$70k allowed** (lesser). **Aggregation election** (optional, must meet requirements): **Purpose**: Combine multiple businesses into single "aggregated trade or business" → Apply W-2/UBIA limitation once (instead of per-business) → Can improve overall deduction. **Requirements** (ALL must be met): (1) Same person(s) own 50%+ of each business (directly/indirectly). (2) Ownership held for **majority of tax year**. (3) Businesses have one of: **Same products/services**. **Shared facilities/centralized functions**. **Supply chain integration** (one business supplies another). **Example where aggregation helps**: **Without aggregation**: **Business A** (manufacturing): $500k QBI, $400k W-2 wages.

Tentative QBI: 20% × $500k = $100,000.

W-2 limit: 50% × $400k = **$200,000** (no limitation). **Allowed**: $100,000. **Business B** (retail): $300k QBI, $50k W-2 wages (low wages hurt).

Tentative QBI: 20% × $300k = $60,000.

W-2 limit: 50% × $50k = **$25,000** (severe limitation). **Allowed**: **$25,000** (capped by W-2). **Total without aggregation**: $100k + $25k = **$125,000**. **With aggregation** (elect to combine): **Combined QBI**: $500k + $300k = $800,000. **Combined W-2 wages**: $400k + $50k = $450,000.

Tentative QBI: 20% × $800k = $160,000.

W-2 limit: 50% × $450k = **$225,000** (no limitation). **Allowed**: **$160,000** (full deduction). **Benefit of aggregation**: $160k - $125k = **$35,000 extra deduction** = $12,950 tax savings (37% bracket). **Aggregation mechanics**: **Step 1**: Identify all qualified businesses owned 50%+ by same person(s). **Step 2**: Group businesses meeting aggregation requirements (shared operations/facilities/supply chain). **Step 3**: Calculate combined QBI, W-2 wages, UBIA for aggregated group. **Step 4**: Apply limitation once to aggregated group (instead of per-business). **Step 5**: File **Aggregation Election Statement** with tax return (first year electing, then binding for future years unless material change). **Once elected**: Must continue aggregating in future years (unless business sold/materially changed).

Can add new businesses to existing aggregated group.

Cannot disaggregate without IRS permission. **When aggregation helps**: One business has high W-2 wages, another has low wages (balances out).

One business profitable, another has loss (netting QBI). **When aggregation hurts**: Mixing SSTB with non-SSTB (SSTB taint can spread, though regulations provide relief).

All businesses have adequate W-2 wages individually (no benefit to combine).

**QBI deduction stacking order** (sequence matters for calculation): **Step 1**: Calculate **Adjusted Gross Income (AGI)**: Gross income - **Above-the-line deductions** (self-employment tax deduction, retirement contributions, health insurance, student loan interest). **AGI includes** QBI (business income), but QBI deduction not yet applied. **Step 2**: Subtract **standard deduction or itemized deductions**: AGI - Standard deduction ($14,600 single, $29,200 married in 2025) = **Taxable income before QBI**. **Step 3**: Calculate **QBI deduction** (based on taxable income from Step 2): Lesser of: (a) 20% × Combined QBI, OR (b) 20% × (Taxable income - Net capital gains).

Apply W-2/UBIA limitations if above threshold. **Step 4**: Subtract QBI deduction: Taxable income (Step 2) - QBI deduction = **Final taxable income**. **Step 5**: Apply **tax rates** to final taxable income → Calculate tax liability. **Step 6**: Subtract **tax credits** (child tax credit, earned income credit, energy credits). **Example calculation** ($150k QBI, $180k total income, married): **Step 1 - AGI**: Gross income: $200,000.

Self-employment tax deduction: -$10,000 (50% of SE tax).

Solo 401(k) contribution: -$30,000. **AGI**: $200k - $10k - $30k = **$160,000**. **Step 2 - Taxable income before QBI**: AGI: $160,000.

Standard deduction: -$29,200. **Taxable income**: $160k - $29.2k = **$130,800**. **Step 3 - QBI deduction**: QBI: $150,000 (from business, part of AGI). 20% × QBI: 20% × $150k = $30,000. 20% × Taxable income: 20% × $130,800 = $26,160. **Lesser**: **$26,160** (taxable income limitation applies).

No W-2 limit (below $383,900 threshold). **QBI deduction**: **$26,160**. **Step 4 - Final taxable income**: $130,800 - $26,160 = **$104,640**. **Step 5 - Tax calculation**: Tax on $104,640 (married 2025 rates): 10% × $23,200 = $2,320. 12% × ($94,300 - $23,200) = $8,532. 22% × ($104,640 - $94,300) = $2,275. **Total tax**: **$13,127**. **Interaction with other deductions**: **QBI does NOT reduce**: Self-employment tax (calculated on gross SE income before QBI).

Above-the-line deductions (retirement, health insurance, SE tax deduction). **QBI DOES reduce**: Final taxable income (after standard/itemized deductions).

Tax liability (indirectly, by lowering taxable income). **QBI vs itemized deductions trade-off**: **Standard deduction** ($29,200 married) reduces taxable income → **Increases QBI deduction** (20% taxable income limit higher). **Itemizing** ($40,000 deductions) reduces taxable income more → **May decrease QBI deduction** (20% taxable income limit lower). **Example**: **Scenario A** (standard deduction): Taxable income: $150,000.

QBI deduction limit: 20% × $150k = $30,000. **Scenario B** (itemize $40k): Taxable income: $139,200 ($150k + std $29.2k - itemize $40k).

QBI deduction limit: 20% × $139,200 = **$27,840** ($2,160 less than Scenario A). **QBI vs capital gains**: **Net capital gains excluded** from 20% taxable income calculation. **Example**: Total taxable income: $200,000.

Long-term capital gains: $50,000.

Ordinary income: $150,000. **QBI limit**: 20% × ($200k - $50k LTCG) = 20% × $150k = **$30,000** (not 20% × $200k = $40k). **Reason**: Prevent double benefit (capital gains already taxed at lower rate, shouldn't also reduce QBI base). **QBI and NOL (Net Operating Loss)**: **QBI loss** from one year carries forward as NOL → Reduces taxable income in future years → Indirectly reduces QBI deduction limit (20% taxable income lower). **Example**: 2024: -$100k QBI loss → $100k NOL carryforward. 2025: $200k QBI income, $200k taxable income (before NOL).

Apply $100k NOL: Taxable income reduced to $100k. **QBI deduction limit**: 20% × $100k = **$20,000** (not 20% × $200k = $40k). **Impact**: NOL reduces QBI benefit in year applied.

**Strategy #1: Increase W-2 wages** (overcome W-2 wage limitation): **Tactic**: Convert independent contractor payments to W-2 employee wages.

Hire family members as employees (legitimate work, reasonable wages).

Pay yourself **reasonable compensation** from S-corp (counts as W-2 wages). **Example**: S-corp with $500k QBI, currently $100k owner W-2 wages, $150k distributions. **Current**: W-2 limit = 50% × $100k = **$50,000** (caps QBI deduction).

Tentative QBI: 20% × $500k = $100k → **Limited to $50k**. **Strategy**: Increase owner W-2 to $200k (reduce distributions to $50k).

W-2 limit = 50% × $200k = **$100,000** (no longer limiting). **Full QBI deduction**: **$100,000** (gain $50k deduction = $18,500 tax savings at 37%). **Trade-off**: Higher W-2 wages = more FICA tax (7.65% × $100k extra wages = $7,650 FICA). **Net benefit**: $18,500 QBI savings - $7,650 FICA = **$10,850 net gain**. **Strategy #2: Maximize UBIA** (qualified property basis): **Tactic**: Purchase depreciable property before year-end (machinery, equipment, buildings).

Delay disposition of qualified property (keep in service, maintain UBIA).

Allocate more of real estate purchase to building (less to land, which doesn't count). **Example**: Real estate investor, $400k QBI, $80k W-2 wages (property manager), $600k taxable income. **Without UBIA planning**: W-2 limit = 50% × $80k = **$40,000**.

Tentative QBI: 20% × $400k = $80k → **Limited to $40k** (lose $40k deduction). **With UBIA planning**: Purchase $2M rental property (allocate $1.6M to building, $400k to land).

UBIA = $1.6M.

W-2/UBIA limit = 25% × $80k + 2.5% × $1.6M = $20k + $40k = **$60,000**. **QBI deduction**: Lesser of $80k vs $60k = **$60,000** (gain $20k deduction = $7,400 tax savings). **Strategy #3: Separate SSTB from non-SSTB activities**: **Tactic**: Spin off non-SSTB activities into separate entity (avoid SSTB taint).

Example: Attorney (SSTB) also owns rental properties → Create separate LLC for rentals. **Example**: Lawyer with $600k income (above $241,950 threshold). **Before separation**: $400k law practice (SSTB) + $200k real estate (non-SSTB, but commingled). **IRS may argue**: Real estate is "ancillary" to law practice → Entire $600k QBI treated as SSTB → **$0 deduction**. **After separation**: **LLC 1** (law practice): $400k QBI → SSTB → **$0 deduction** (phased out). **LLC 2** (rental real estate): $200k QBI → Non-SSTB → Subject to W-2/UBIA limit (not SSTB phase-out).

Assume W-2 $50k, UBIA $3M → Limit = $87,500 (from earlier example). **QBI deduction**: Lesser of 20% × $200k = $40k vs $87.5k = **$40,000** (save $14,800 tax). **Strategy #4: Aggregate related businesses** (optimize W-2/UBIA limits): **Tactic**: Elect aggregation for businesses meeting requirements (50% common ownership, integrated operations).

Shift W-2 wages between aggregated businesses to optimize limit. **Example**: **Business A** (capital-intensive): $300k QBI, $50k W-2 wages, $2M UBIA.

W-2 limit alone: 50% × $50k = $25k (insufficient).

W-2/UBIA: 25% × $50k + 2.5% × $2M = $12.5k + $50k = $62.5k (better). **Business B** (labor-intensive): $200k QBI, $200k W-2 wages, $100k UBIA.

W-2 limit: 50% × $200k = $100k (sufficient, no limitation). **Without aggregation**: A deduction: Lesser of 20% × $300k = $60k vs $62.5k = $60k.

B deduction: 20% × $200k = $40k (no limit). **Total**: $60k + $40k = $100,000. **With aggregation**: Combined QBI: $500k.

Combined W-2: $250k.

Combined UBIA: $2.1M.

W-2 limit: 50% × $250k = **$125,000**.

Tentative QBI: 20% × $500k = **$100,000**. **Total deduction**: $100,000 (same result, but protects if Business B wages drop). **Strategy #5: Income timing and threshold management**: **Tactic**: Defer income to stay below phase-in threshold ($191,950 single, $383,900 married).

Accelerate deductions (retirement contributions, equipment purchases with Section 179). **Example**: Single taxpayer, projected $210k taxable income (within $191,950-$241,950 phase-in). **Without planning**: Partial SSTB phase-out or W-2 limitation applies. **With planning**: Contribute $19k to Solo 401(k) → Taxable income reduced to $191k. **Result**: Fall below threshold → **Full 20% QBI deduction** (no limitations, including SSTB). **Benefit**: Avoid complex calculations, maximize deduction. **Strategy #6: Reasonable compensation optimization** (S-corp): **Tactic**: Balance W-2 wages (increase for QBI limit) vs FICA tax avoidance (distributions not subject to FICA). **Rule of thumb**: W-2 wages = 30-50% of S-corp income (IRS "reasonable compensation" safe harbor). **Example**: $400k S-corp income. **Scenario A** (low W-2): $100k W-2, $300k distribution.

W-2 limit: 50% × $100k = $50k → **Caps QBI deduction**. **Scenario B** (optimal W-2): $200k W-2, $200k distribution.

W-2 limit: 50% × $200k = $100k → **No QBI cap**.

Extra FICA: 15.3% × ($200k - $100k) = $15,300.

Extra QBI deduction: $50k = **$18,500 tax savings** (37% bracket). **Net benefit**: $18,500 - $15,300 = **$3,200 gain**.