The United States 🇺🇸 will continue to allow pass-through business owners to claim the Qualified Business Income (QBI) deduction in 2025, but the size of the benefit depends on taxable income and how much the business pays in W-2 wages or holds in qualified property measured by unadjusted basis immediately after acquisition (UBIA).
Phase-in ranges and thresholds
- For single filers, the phase-in range runs from $197,300 to $247,300.
- For married filing jointly, the phase-in range starts at $394,600 and—under changes attributed to the One Big Beautiful Bill Act (OBBBA)—now extends to $544,600, up from $494,600.
Important: Once taxable income is above the upper threshold, the QBI deduction cannot exceed the greater of:
– 50% of W-2 wages, or
– 25% of W-2 wages plus 2.5% of UBIA.
These wage/property rules mirror limitations applied to specified service trades or businesses (SSTBs) and only apply when taxable income crosses the relevant threshold.
How the QBI deduction is computed (three-part check)
Officials stress that the QBI deduction—often summarized as “up to 20% of qualified business income”—is not a flat cut. It is determined through three sequential steps:
- Base calculation: Compute 20% of QBI.
- Wage/UBIA limitation (only when taxable income exceeds the threshold): Compare and cap the base against the greater of:
- 50% of W-2 wages, or
- 25% of W-2 wages + 2.5% of UBIA.
- Taxable income cap: Finally cap the result at 20% of taxable income (before the QBI deduction).
- Filers under the threshold generally get the QBI deduction without the wage or property limits.
- Filers above the threshold may see the benefit sharply reduced—especially owners with few employees or minimal qualified property.
Practical shortcut for many filers
A useful rule: if a taxpayer’s QBI deduction is already less than 50% of W-2 wages, there’s no need to apply the phased-in reduction math. In that case the full QBI deduction (subject to the 20% of taxable income cap) is allowed. This matters because some small employers pay enough in W-2 wages that the wage-based caps won’t bite, even at higher income levels.
However, once income moves more than $50,000 above the threshold for single filers (or $100,000 for married filing jointly), the filer faces the full reduction formula: the QBI component is limited to the greater of the wage-only or wage-plus-UBIA test.
Example: how the cap works above the upper threshold
A single taxpayer with a manufacturing sole proprietorship reports:
- QBI = $70,000
- W-2 wages = $20,000
- UBIA = $100,000
Step-by-step:
- 20% of QBI = $14,000.
- Wage/property cap: greater of
- 50% of W-2 wages = $10,000; or
- 25% of W-2 wages + 2.5% of UBIA = $5,000 + $2,500 = $7,500.
- Lesser of base and cap: min($14,000, $10,000) = $10,000 final QBI deduction.
Business behavior incentives
Tax professionals say the wage/UBIA cap encourages owners to consider payroll and capital investment when income exceeds the phase-in range. The law ties the maximum QBI deduction to either labor costs or the unadjusted basis of tangible property (equipment, real estate). Thus, two businesses with the same income may see different deductions if:
- One uses employees while the other relies on contractors, or
- One places more qualified property in service.
SSTBs (Specified Service Trades or Businesses)
- Fields such as health, law, and consulting are typically SSTBs.
- For SSTB owners, the QBI deduction phases out within the threshold window and disappears entirely above the upper limit (previously $247,300 for singles and $494,600 for joint filers).
- Under OBBBA (2025), SSTBs are treated more favorably by broadening phase-out ranges and allowing partial deductions inside the range, softening the cliff effect.
- Still, once income exceeds the upper limit, SSTB owners generally lose the benefit.
Items that are NOT QBI and other long-standing rules
- The QBI deduction does not reduce adjusted gross income, self-employment tax base, or the net investment income tax base.
- Income types excluded from QBI include:
- Wage income
- Capital gains
- Investment income
- Guaranteed payments
- Publicly traded partnership income
- Special reduction rules apply for patrons of agricultural or horticultural cooperatives.
- Looking ahead, a change set for 2026 would allow a minimum $400 QBI deduction for taxpayers with at least $1,000 in QBI from an active qualified trade or business.
Step-by-step planning checklist
High-level steps for owners planning their QBI claim:
- Confirm whether taxable income is:
- below the threshold,
- inside the phase-in window, or
- above the upper limit.
- Compute 20% of QBI.
- If above the threshold, compute the wage/property cap using both:
- 50% of W-2 wages; and
- 25% of W-2 wages + 2.5% of UBIA, and take the higher of those two numbers.
- The QBI deduction is the smallest of:
- 20% of QBI,
- the wage/property cap (when applicable), and
- 20% of taxable income.
- Keep strong records for W-2 wages and qualified property basis to support calculations.
Recordkeeping and year-end moves
Simple preparatory actions:
- Keep year-end payroll reports showing total W-2 wages paid by the business.
- Track qualified property placed in service and its UBIA, including dates and cost.
- Confirm taxable income ranges early to know if the wage/UBIA limits will apply.
- For SSTBs, verify whether taxable income is inside the phase-out range—partial deductions may still be available in 2025.
VisaVerge.com analysis notes that careful year‑end planning—such as timing equipment purchases or adjusting payroll—can affect the final allowable deduction without changing core business goals.
Policy context
- Congress continues to debate how generous the deduction should be for high earners.
- Proposals from the House Ways and Means Committee have included ideas to expand the benefit (e.g., removal of hard caps, flat percentage phase-outs), which could increase deductions for some owners beyond current 2025 law.
- For now, OBBBA’s higher $544,600 upper phase-in mark (married filing jointly) broadens access to at least a partial deduction for more households filing jointly.
Who this affects
Although this is federal tax law (not a visa rule), many immigrant entrepreneurs who run pass-through entities are affected—small restaurants, tech consultants, and family-run manufacturers commonly operate as sole proprietorships, S corporations, or partnerships. When income rises, the QBI deduction can shrink unless W-2 wages or UBIA support the cap.
Final reminders and authoritative source
- The W-2/UBIA limitation does not apply unless taxable income exceeds the threshold amount.
- Caps begin to matter inside the phase-in range and reach full force if income surpasses the upper limit by $50,000 (single) or $100,000 (joint).
- At that point the QBI component is strictly limited to the greater of the wage-only test or the wage-plus-UBIA test.
The Internal Revenue Service continues to administer the provision and update guidance. For authoritative details and examples, see the IRS page: https://www.irs.gov/newsroom/qualified-business-income-deduction.
Key takeaway: Filers under the threshold can often claim the full 20% with little fuss. Filers above it must measure benefits against W-2 wages and UBIA—and SSTBs at higher income levels may see the deduction vanish. Careful recordkeeping and timely calculations make the difference between a full deduction and a capped result.
This Article in a Nutshell
In 2025 the QBI deduction remains available but is subject to income-based phase-ins and wage/property limitations. Single filers phase in between $197,300 and $247,300; married filing jointly phase in from $394,600 to $544,600 following OBBBA changes. The deduction calculation is threefold: compute 20% of QBI, apply wage/UBIA limits if taxable income exceeds the threshold (the deduction cannot exceed the greater of 50% of W-2 wages or 25% of W-2 wages plus 2.5% of UBIA), and cap the result at 20% of taxable income. Filers under thresholds typically receive the full deduction; those above may see sharp reductions, particularly businesses with low payroll or minimal qualified property. SSTBs phase out and generally lose the deduction above the upper limit, though OBBBA softens this effect. Taxpayers should confirm income range, compute both limitation tests when needed, and maintain W-2 and UBIA records. Year-end decisions on payroll and capital purchases can alter allowable deductions.
