What is qualified business income?

Qualified business income (QBI) is the net income from a qualified trade or business operated as a sole proprietorship or through a pass-through entity, potentially eligible for the Section 199A deduction. For professional service firm owners, the QBI calculation determines eligibility for the 20% deduction, subject to income limitations.

Key characteristics

• Net income from a qualified business

• Pass-through entity income

• Basis for Section 199A deduction

• Subject to income limitations

• Professional services may be limited

• Calculated annually

Why it matters for professional service firms

The QBI deduction can save thousands in taxes, but professional service firms face limitations above certain income thresholds. Understanding QBI helps with tax planning and entity structure decisions. Firm owners should calculate QBI and understand how limitations affect their deduction.

Real-world example

Brian's consulting LLC had a net income of $320,000. As a specified service trade, his QBI deduction was limited because taxable income exceeded the phase-out threshold. Tax planning: calculated phase-out impact, determined optimal taxable income level, and increased retirement contributions to maximize deductions—result: captured $38,000 QBI deduction, saving approximately $9,500 in taxes.