What Is the Qualified Business Income Deduction—and Can You Still Take Advantage of It in 2025?
Whether you’re a contractor, consultant, tradesperson, or own a service-based firm, the Qualified Business Income (QBI) deduction may be one of the most powerful—and often overlooked—ways to reduce your tax burden.
But here’s the catch: it might not be around for much longer.
What Is the QBI Deduction?
The Qualified Business Income deduction—also referred to as the Section 199A deduction—was introduced as part of the 2017 Tax Cuts and Jobs Act (TCJA). It allows eligible owners of pass-through entities (sole proprietors, partnerships, S-corporations, and some LLCs) to potentially deduct up to 20% of their qualified business income from their taxable income.
In plain English? If you have $200,000 in qualified business income, you may be able to knock $40,000 off your taxable income just with this deduction alone.
That’s a significant win for small business owners—especially those thinking about retirement and focused on maximizing the after-tax value of their business income or future sale proceeds.
Am I Eligible for the QBI Deduction?
Here’s a simplified breakdown to help determine whether you qualify in 2025:
Your business must be a pass-through entity
C-corporations do not qualify. But if you're a sole proprietor, in a partnership, or operate an S-corp, you're in the running.
You must have Qualified Business Income
This generally includes your net business income (revenue minus expenses). It excludes:
Wages you earn as an employee
Capital gains or losses
Dividends and interest income
Certain investment income or guaranteed payments
You must fall below certain income thresholds
For 2025, the QBI deduction begins to phase out for:
Single filers at $197,300 and is fully phased out at $247,300
Married couples filing jointly at $394,600 and is fully phased out at $494,600
Above those limits, eligibility gets more complex—especially for Specified Service Trades or Businesses (SSTBs) such as law, accounting, consulting, and financial services. If your business falls into this category, you may be subject to additional restrictions or even disqualified if you exceed the income thresholds.
How Much Could You Save?
If you qualify, the deduction is generally the lesser of 20% of your QBI or 20% of your taxable income (excluding capital gains).
For those with higher incomes, an additional calculation kicks in:
50% of W-2 wages paid by the business, or
25% of W-2 wages paid plus 2.5% of unadjusted basis of qualified property
This formula can be a bit technical, but that’s where a Certified Financial Planner (CFP®) or CPA who specializes in small business retirement and tax strategy can help you navigate the details.
Why This Matters Now—The Sunset Clause Is Approaching
One of the biggest threats to the QBI deduction is that it’s set to expire after 2025 unless Congress extends it. That means the tax benefit could vanish in 2026.
For business owners nearing exit planning or transitioning into retirement, that’s a critical deadline. If you’re planning to sell your business—or even just slow down and take more income—you may want to consider accelerating your earnings or optimizing your income structure now to lock in these savings while they're still available.
Market Volatility: A Wake-Up Call for Tax Planning
It’s easy to get distracted by swings in the stock market, but smart financial advisors use moments of volatility to zoom out and remind clients of broader planning opportunities. That includes:
Rebalancing investments for long-term growth
Harvesting tax losses or converting to Roth IRAs while valuations are low
Revisiting income and distributions to reduce tax exposure
Running scenarios on how a potential business sale fits into your future
Market corrections aren't just stressful—they’re a signal to sharpen your tax and retirement strategy.
The QBI Deduction in Real Life: A Quick Example
Meet Joe, a 60-year-old plumbing business owner in Charlotte, NC. His business is structured as an S-corp, and in 2025 he expects to earn $180,000 in QBI and another $30,000 in capital gains from investments. He’s married and files jointly.
Because his total taxable income ($210,000) falls under the $394,600 threshold for married couples, he qualifies for the full QBI deduction.
20% of $180,000 = $36,000 deduction
That’s $36,000 of income that won’t be taxed at all.
Assuming Joe is in the 24% marginal tax bracket, this deduction could save him around $8,600 in taxes—money he can use to fund his retirement account or reinvest in his business ahead of a future sale.
How Retirement Plan Contributions Impact Your QBI Deduction
Here’s a nuance many small business owners overlook: your pre-tax retirement plan contributions could reduce your QBI deduction—but that doesn’t necessarily mean you should stop making them.
If you’re contributing to a 401(k), SEP IRA, or SIMPLE IRA, those contributions reduce your taxable income and your qualified business income. That matters because the QBI deduction is based on 20% of your QBI—not your gross income.
So, Does Contributing to a Retirement Plan Hurt You?
Not necessarily. While your QBI deduction might be smaller, the overall tax savings from reducing your Adjusted Gross Income (AGI) can still be significant—especially if:
You want to avoid IRMAA surcharges on Medicare
You qualify for other deductions or credits based on your AGI
You expect to be in a lower tax bracket in retirement
For many business owners, pre-tax retirement contributions remain a tax-smart move even if they reduce the QBI deduction slightly.
Example: A $20,000 retirement contribution might reduce your QBI by the same amount, potentially lowering your QBI deduction by $4,000 (20%). But that contribution could save you far more on income taxes and Medicare premiums, depending on your bracket and situation.
Strategic Tip: Roth 401(k) and Mega Backdoor Roth Options
If you're concerned about losing part of your QBI deduction but still want to save aggressively, you may consider:
Roth 401(k) contributions (which don’t reduce QBI)
Mega backdoor Roth strategies, if your plan allows, to grow tax-free wealth without affecting QBI or AGI
These options can be especially effective if you expect to be in a higher tax bracket in retirement—or if you simply want to hedge against future tax increases.
Action Items for 2025
Review your business structure.
Is your entity optimized for QBI and future sale planning? Now’s the time to evaluate.
Check your taxable income.
Falling below the phase-out thresholds could unlock thousands in tax savings. Strategic retirement contributions or income deferral might get you there.
Coordinate with your financial planner and CPA.
They can run projections to make sure your QBI deduction is optimized, and help you plan around the 2026 sunset.
Start modeling your exit.
If you’re within five years of selling your business, it’s time to begin designing a tax-efficient retirement and wealth transfer plan that includes QBI, asset sales, estate planning, and more.
Key Takeaway
Your retirement contributions and your QBI deduction are both valuable tools—but they don’t always play nice. That’s why it’s crucial to model your options each year. You may find that a small sacrifice in QBI savings is well worth the long-term retirement and AGI benefits.
Work With a Financial Quarterback Who Knows Small Business
At Integritas Financial, we specialize in helping small business owners transition into retirement confidently. As a Certified Financial Planner™, I help you coordinate everything from tax strategies and estate planning to risk management and exit planning—so you’re not leaving anything on the table when you sell your business.
I believe in education-first financial advice. No pressure, no jargon—just the clarity and confidence you deserve after years of building something great.
The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.
This content not reviewed by FINRA
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