The deduction in brief
The qualified business income deduction under IRC 199A lets owners of sole proprietorships, partnerships and S corporations deduct up to 20% of their business income. The 2025 tax law made it permanent at 20% and widened the range over which the limits phase in. It is capped at 20% of taxable income, measured before the deduction itself and excluding net capital gain.
Two limits apply once taxable income passes a threshold, and phase in fully over the range above it:
- A specified service business, such as health, law, accounting, consulting, financial services or the performing arts, loses the deduction entirely above the range.
- Any other business is limited to the greater of 50% of the W-2 wages it pays, or 25% of those wages plus 2.5% of the original cost of its depreciable property.
| Filing status | Limits start above | Fully phased in at |
|---|---|---|
| Married filing jointly | $403,500 | $553,500 |
| Single | $201,750 | $276,750 |
| Head of household | $201,750 | $276,750 |
| Married filing separately | $201,775 | $276,775 |
From 2026 there is also a minimum deduction of $400 for anyone with at least $1,000 of qualified business income from businesses they actively run. Whether it reaches a specified service business above the range is unsettled.
Why a contribution reduces qualified business income
Treasury regulations treat the deduction for contributions to a qualified retirement plan as attributable to the business the income came from (Treas. Reg. 1.199A-3(b)(1)(vi)). So the contribution comes off qualified business income as well as taxable income.
| Business type | What the contribution reduces |
|---|---|
| Sole proprietor | Qualified business income, by the cash balance contribution, 401(k) profit sharing and pre-tax salary deferrals |
| Partner | The same, from the partner's share of the partnership's income |
| S corporation owner | The K-1 income, by the cash balance contribution and profit sharing. Your own salary deferrals reduce your wages, not qualified business income |
| C corporation owner | Nothing: C corporation income is not eligible for the deduction |
For S corporation owners, your own salary is not qualified business income, but it does count as W-2 wages for the wage limit. See S corporation owners.
Below the threshold: about 80 cents on the dollar
If your taxable income is under the threshold before and after the contribution, both taxable income and qualified business income fall by the amount you put in. The deduction falls by 20% of it, so taxable income goes down by about 80% of the contribution rather than all of it.
| Contribution | QBI deduction after | Federal tax saved | Saved per dollar |
|---|---|---|---|
| None | $33,957 | ||
| $25,000 | $28,957 | $4,800 | 19.2% |
| $50,000 | $23,957 | $9,403 | 18.8% |
| $100,000 | $13,957 | $18,203 | 18.2% |
A 24% bracket turns into a saving of about 19.2% per dollar, and less as larger contributions reach into lower brackets. This is one reason a marginal-rate rule of thumb overstates what a contribution saves. The rest is deferred, not lost: money that comes out of the plan in retirement is taxed as ordinary income.
Specified service businesses near the phase-out
For a specified service business, the deduction shrinks across the phase-in range and disappears at the top of it: above $276,750 for a single filer or $553,500 for a married couple filing jointly. A contribution that brings taxable income back down through that range does two things at once. It shelters income, and it switches the deduction back on.
| Contribution | Taxable income before QBI deduction | QBI deduction | Federal tax saved | Saved per dollar |
|---|---|---|---|---|
| None | $298,042 | $0 | ||
| $25,000 | $273,042 | $400 | $8,890 | 35.6% |
| $50,000 | $248,042 | $7,740 | $19,731 | 39.5% |
| $75,000 | $223,042 | $24,527 | $32,842 | 43.8% |
| $100,000 | $198,042 | $39,608 | $42,462 | 42.5% |
| $150,000 | $148,042 | $29,608 | $52,062 | 34.7% |
Before any contribution this owner is above the range and gets no deduction, with income taxed at up to 35%. At $75,000 the saving works out to 43.8% of the contribution, more than the top bracket, because part of the deduction has come back. Past the point where taxable income drops below $201,750, each further dollar is back to saving about 80% of the bracket rate, and the average falls.
The same pattern applies to married couples, around $403,500 to $553,500 of taxable income. Examples of specified service work include physicians, attorneys, consultants and accountants. Engineering and architecture are specifically excluded from the list; see engineers and architects.
Other businesses above the threshold
A business that is not a specified service is still subject to the wage limit above the threshold. A sole proprietor or partner with no employees pays no W-2 wages, so unless the business owns significant depreciable property, the limit is close to zero and the deduction behaves much like a specified service business's: it fades across the range and is gone above it. A contribution that brings income back into or below the range can restore it.
An S corporation owner is different, because the salary the corporation pays you counts as W-2 wages. With a reasonable salary, the wage limit may be well above 20% of the business income, in which case the contribution simply reduces the deduction by 20 cents per dollar.
What this means for choosing an amount
The QBI deduction is one reason the saving from a contribution is rarely a flat percentage. It interacts with the brackets, the phase-in range and your household's other income, including a spouse's pay. For some owners the first dollars contributed save the most; for others the saving per dollar rises before it falls.
Most states start from federal adjusted gross income, which comes before the QBI deduction, so at the state level a contribution usually reduces taxable income dollar for dollar. A few states that start from federal taxable income may differ.
The cash balance plan calculator runs the full calculation before and after the contribution, including the QBI deduction, rather than using a marginal rate. For a decision about how much to contribute in a given year, talk to your tax adviser.