Qualified Business Income (QBI) Deduction

Section 199A allows owners of partnerships, S-corps, and sole proprietorships to deduct up to 20% of their qualified business income from their taxable income. In effect, it lets passthrough owners keep roughly the same tax rate as C-corps after the 21% corporate rate — the counterweight Congress built into the 2017 tax law to keep the two structures comparable.

The deduction phases out for high-income owners in 'specified service trades or businesses' (SSTBs): health, law, accounting, consulting, financial advisory, and others where the business's principal asset is the reputation or skill of one or more employees. Below the phase-out thresholds (2025: $241,950 single / $483,900 MFJ, indexed annually), the SSTB restriction doesn't apply; above them, it phases in over a $50k / $100k range and then eliminates QBI entirely for SSTB owners.

For non-SSTB businesses at the same income levels, the deduction switches to a formula limited by the greater of (a) 50% of W-2 wages paid, or (b) 25% of wages plus 2.5% of the unadjusted basis of qualifying property. This is the wages-and-property limit — the reason S-corp owners in a growing business sometimes RAISE their reasonable comp to preserve the deduction, and the reason capital-intensive businesses often out-preserve QBI vs pure services.

For S-corp owners specifically, the calculation is fiddly enough to model annually. Reasonable compensation reduces QBI (wages are not QBI) but also increases the wage-based cap — the optimum comp level for QBI is rarely the same as the minimum defensible level for reasonable-comp purposes. Getting this wrong costs real money: the difference between fully claiming and fully losing QBI on $400k of business income is $80k of deduction, or ~$29k of federal tax at a 37% bracket.