What are Qualified Business Income (QBI) deduction rules for 2025?

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Qualified Business Income (QBI) deduction rules for 2025

What the deduction is

• The QBI deduction allows up to 20% of your net qualified business income from domestic trades or businesses, plus up to 20% of qualified REIT dividends and qualified publicly traded partnership (PTP) income. The total deduction is limited to the lesser of that combined amount or 20% of your taxable income (before the QBI deduction) reduced by net capital gain (increased by any qualified dividends) 1

Who can claim and how

• Individuals and eligible estates and trusts claim the deduction on their returns; C corporations cannot. Partnerships and S corporations do not take the deduction themselves but must report the necessary QBI/W‑2/UBIA/REIT/PTP details to owners on Schedule K‑1 so owners can compute the deduction 2
• For pass‑throughs, the deduction is computed at the partner/shareholder level under subchapters K and S; taking the deduction does not affect a partner’s basis, an S shareholder’s stock basis, or the S corporation AAA. The deduction also does not reduce self‑employment tax or the net investment income tax 3

What counts as QBI

• QBI is the net amount of qualified items of income, gain, deduction, and loss from your trades or businesses that are effectively connected with a U.S. trade or business and allowed in computing taxable income. Exclusions include wages, reasonable compensation from an S corporation, guaranteed payments, partner payments for services, items treated as capital gains/losses, dividends, interest not properly allocable to a trade or business, certain commodity/FX amounts, notional principal contract items, and annuities (unless connected to the business). Qualified REIT dividends and qualified PTP income are not QBI (they are part of a separate REIT/PTP component) 1
• A “trade or business” generally means one under section 162 (profit motive, continuity, and regularity), excluding employment services. Certain rentals to commonly controlled trades or businesses can be treated as a trade or business for 199A purposes even if they don’t rise to section 162 level 3
• For nonresident aliens, only items effectively connected with a U.S. trade or business can be included as QBI; the regulations cross‑reference section 864(c) rules on ECI 4
• Special Puerto Rico rule: if all your QBI from Puerto Rico is taxable under section 1, the United States is treated as including Puerto Rico for QBI purposes 5

Income thresholds, SSTBs, and the W‑2 wage/UBIA limits

Thresholds and phase‑ins (2025)

• The wage/UBIA limitation and special rules for specified service trades or businesses (SSTBs) apply only when your taxable income (before the QBI deduction) exceeds an inflation‑adjusted threshold. The thresholds are adjusted annually; see the current Form 8995 or 8995‑A instructions for the 2025 inflation‑adjusted amounts. For reference, the 2024 thresholds were $383,900 MFJ and $191,950 for all other filers (phase‑in up to $483,900 MFJ/$241,950 others) 6
• When over the threshold, the QBI component for each trade or business may be limited to the greater of 50% of W‑2 wages, or 25% of W‑2 wages plus 2.5% of the unadjusted basis immediately after acquisition (UBIA) of qualified property, with the limitation phased in between the threshold and the top of the phase‑in range, and fully applying above the phase‑in range 1
• SSTBs (for example, certain health, law, accounting, consulting, financial services, and similar fields) are generally not qualified trades or businesses when your taxable income exceeds the top of the phase‑in range; below the threshold they are treated like other trades or businesses. Confirm your trade/business classification and thresholds in the 8995‑A instructions 2

Aggregation and combining businesses

• If you aggregate trades or businesses under the aggregation rules, you must combine QBI, W‑2 wages, and UBIA amounts across the aggregated group when applying wage/UBIA limitations 1

REIT and PTP components

• In addition to the QBI from trades or businesses, you may claim a separate 20% deduction on qualified REIT dividends and qualified PTP income. These items are not part of QBI itself but are included in the overall section 199A deduction and are also limited by the 20% of taxable income minus net capital gain cap 1

Carryovers and losses

• If your total QBI amount is negative for the year, the QBI portion of the 199A deduction is zero, and the negative amount is carried forward as negative QBI to offset QBI in the next year. A negative combined REIT/PTP amount is also carried forward to offset future qualified REIT/PTP amounts. These carryovers don’t affect loss deductibility under other Code provisions 4
• On simplified Form 8995, negative amounts on the relevant line are explicitly carried forward to the next year and do not affect other provisions 6

Forms and computation

Choosing the right form

• Use Form 8995 (simplified computation) if your taxable income is at or below the annual threshold; otherwise, use Form 8995‑A. S corporations and partnerships do not file these forms but must pass information to owners; K‑1 instructions tell owners where to find section 199A items 2
• S corporation K‑1 instructions explain that shareholders may be eligible for up to a 20% 199A deduction and must use Form 8995 or 8995‑A depending on their taxable income. They will receive the necessary section 199A statements from the S corporation 7

Taxable income limit mechanics

• For Form 8995, taxable income before the QBI deduction (and the net capital gain/qualified dividend reduction) is computed using specific lines on Form 1040/1041/990‑T/ESBT worksheets as laid out in the instructions. The QBI deduction is capped at 20% of this taxable income base, net of capital gain and qualified dividends 6

Additional administrative rules

• Disregarded entities are disregarded for section 199A; the deduction coordinates with AMT (same amount), and it does not reduce self‑employment income or NIIT 3
• Cooperatives and patrons have special rules under section 199A; cooperatives do not claim 199A but report to patrons, and patrons may have reductions for specified agricultural/horticultural cooperative payments. See the cooperative and patron guidance in section 199A regulations and the 8995‑A instructions if applicable 8

Practical tips for 2025

• Confirm your 2025 inflation‑adjusted threshold and phase‑in amounts in the current Form 8995/8995‑A instructions; the thresholds are adjusted annually, and the 2024 figures shown above are for reference only 6
• Ensure your K‑1s include section 199A statements for each pass‑through entity so you can properly compute QBI, W‑2 wages, and UBIA; S corporation K‑1 instructions call this out for 199A 7

Sources

1 – IRS.gov – Instructions for Form 8995-A (2024) 📄 Summarize
2 – IRS – Instruction 8995-A Instructions for Form 8995-A, Deduction for Qualified Business Income 📄 Summarize
3 – Treasury Regulation 1.199A-1 📄 Summarize
4 – Regulation 107892-18 📄 Summarize
5 – IRC § 199A(f) 📄 Summarize
6 – IRS – Instruction 8995 Instructions for Form 8995, Qualified Business Income Deduction Simplified Computation 📄 Summarize
7 – IRS – Instruction 1120-S (Schedule K-1) Shareholder’s Instructions for Schedule K-1 (Form 1120-S), Shareholder’s Share of Income, Deductions, Credits, etc. 📄 Summarize
8 – Treasury Regulation 1.199A-7 📄 Summarize

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