If you run a business that isn't a C-corp (a sole prop, an S-corp, an LLC, a partnership, even some rentals), you may get to deduct 20% of your business income right off the top of your federal tax. It's called the QBI deduction, and it's one of the biggest tax breaks in the code for small business owners.
The basic deal
Add up your qualified business income for the year. Deduct 20% of it. If you make $100,000 of business profit, you only pay tax on $80,000 of it. Simple at the bottom; complicated once your income climbs.
The income threshold that changes everything
Below an income threshold, almost any business qualifies for the full 20%. Above it, two things happen:
- Service businesses get phased out. Doctors, lawyers, accountants, consultants, financial advisors, brokers, performers, athletes (the "SSTB" list) start losing the deduction as their income rises, and eventually lose it entirely.
- Everyone else gets a wage / property test. Your deduction is capped at the greater of 50% of W-2 wages your business paid or 25% of wages plus 2.5% of the cost of certain depreciable property. Run an S-corp with no wages? Above the threshold, you get zero.
What counts as QBI and what doesn't
QBI is your ordinary business income, net of business deductions. It does not include investment income (capital gains, dividends, interest), W-2 wages you pay yourself, or guaranteed payments from a partnership. Rental real estate counts only if it rises to the level of a trade or business.
The bottom line
For business owners earning under the threshold, this is a near-automatic 20% off. Above the threshold, it's a planning exercise where wages, entity choice, and property purchases all move the deduction. A Breadify membership runs the numbers and structures the year around them.