Understanding QBI Deduction: Eligibility, SSTBs, and 2025 Thresholds

The federal government kept in place a major tax break that affects many small business owners, including thousands of immigrant entrepreneurs: the Qualified Business Income (QBI) deduction. As of September 7, 2025, eligible taxpayers can still deduct up to 20% of their qualified business income (QBI) from federal income tax.

This benefit applies to income from a pass-through business—such as a sole proprietorship, partnership, S corporation, or certain trusts and estates—and remains available after lawmakers made it permanent in late 2024 under the One Big Beautiful Bill Act. For 2025, the taxable income thresholds are $197,300 for single filers and $394,600 for married couples filing jointly. Below these marks, most owners can take the full deduction, and even income from a specified service trade or business (SSTB) can count. Above the thresholds, limits tied to W‑2 wages and the basis of qualified property start to apply.

What QBI Is (and What It Means)

At its core, QBI is the net amount of qualified items of income, gain, deduction, and loss from a qualified trade or business. The phrase “qualified items” is important: only amounts included in taxable income and tied to the trade or business can count toward QBI.

Key requirements and clarifications:
– Income must be from domestic business activity that is effectively connected with a U.S. trade or business.
– Special note for Puerto Rico: if an individual’s QBI from sources within the Commonwealth is fully taxable under Section 1 for the year, the “United States” is treated as including Puerto Rico for QBI purposes.

Items Excluded from QBI

QBI excludes many items that commonly trip up new filers. These excluded items include:

• Items not properly includable in taxable income
• Investment items, like capital gains or losses and dividends
• Interest income not properly allocable to a trade or business
• Wage income (W‑2)
• Income not effectively connected with a U.S. trade or business
• Commodities transactions and foreign currency gains or losses
• Certain dividends and payments in lieu of dividends
• Income, loss, or deductions from notional principal contracts
• Annuities, unless received in connection with the business
• Reasonable compensation paid by an S corporation to an owner
• Guaranteed payments from a partnership
• Payments to a partner for services not in their capacity as a partner
• Qualified REIT dividends
• Publicly traded partnership (PTP) income for the QBI component

What Counts as a “Qualified Trade or Business”

A qualified trade or business covers nearly any trade or business, except:
– an SSTB, and
– services performed as an employee.

Important caveat: the SSTB exclusion phases in only when taxable income rises above the threshold. That means a taxpayer whose taxable income stays under the threshold can treat SSTB income as QBI for the deduction. This rule helps many professionals and consultants who keep taxable income below the limit.

Two Components of the Deduction

The deduction has two pieces:

1. QBI component
   • Generally 20% of QBI from domestic qualified trades or businesses, after accounting for allowed deductions tied to the business.
2. REIT/PTP component
   • Generally 20% of qualified REIT dividends and PTP income, calculated separately and added to the QBI component, subject to the overall limit.
   • The REIT/PTP piece isn’t capped by W‑2 wages or qualified property, but it still depends on income level and the nature of the PTP.

How to Compute QBI (Per Trade or Business)

Taxpayers must compute QBI for each qualified trade or business separately. Steps and examples:

• Add up qualified items within each business.
• Subtract only the deductions that are allowed in figuring taxable income for the year.

Example:
– A store earns $100,000 of ordinary income and makes a $25,000 capital expenditure amortized over 5 years.
– Only the current-year amortization of $5,000 reduces QBI.
– That leaves $95,000 of QBI for the year.

You cannot reduce QBI with amounts that are disallowed by basis, at‑risk, passive loss, or Section 461(l) rules until those amounts become allowed in a later year. When they become allowed, they generally are taken into account for QBI—except if they were carried over from years ending before January 1, 2018.

Loss timing example:
– A taxpayer had a $50,000 passive loss in 2020 that was disallowed in 2020.
– In the current year, $20,000 of that 2020 loss becomes allowed.
– That $20,000 is included when figuring QBI for the current year.

This is common for rental or partnership investors—track suspended losses carefully.

Owner Pay and QBI: Clear Lines

The law excludes wage-like payments from QBI to prevent salary shifting:

• Excluded: amounts an S corporation treats as reasonable compensation to a shareholder-employee.
• Excluded: guaranteed payments from a partnership.
• Excluded: amounts paid to a partner for services when the partner acts other than in their capacity as a partner.

In plain terms: wages and wage-like payments don’t count toward QBI.

Practical Guidance for Immigrant Founders

For immigrant founders in the United States 🇺🇸, QBI can be especially valuable:

• Many start as sole proprietors or partners while building a client base; the deduction can reduce tax bills in early years when cash is tight.
• Owners must:
  • separate wage income from QBI,
  • track each trade or business separately, and
  • confirm that foreign‑source income isn’t included unless effectively connected with a U.S. trade or business.
• Example: a consultant living in the U.S. who earns fees tied to work performed outside the country may find those amounts outside QBI unless effectively connected to a U.S. trade or business.

Analysis by VisaVerge.com notes that the inflation-adjusted thresholds for 2025 preserve broad access for lower- and middle‑income owners, while the phaseout ties larger deductions to real payroll and investment in qualified property. This design favors established firms that pay W‑2 wages or hold significant equipment, while still leaving room for solo owners to benefit when taxable income stays below the caps.

Compliance: Forms and IRS Guidance

Most individuals compute the deduction on Form 8995, while more complex cases—multiple businesses, loss carryovers, phased limits—use Form 8995-A. The IRS central guide includes instructions and FAQs:

• IRS Qualified Business Income (QBI) deduction page
• About Form 8995
• About Form 8995-A

Owners should check the latest instructions each filing season because threshold figures adjust for inflation and examples often change.

Limits for Businesses Above the Thresholds

For taxpayers with income above the thresholds, run the wage and property tests. The deduction is limited based on the greater of:

1. 50% of W‑2 wages paid by the trade or business, or
2. 25% of W‑2 wages plus 2.5% of the unadjusted basis immediately after acquisition of qualified property.

Notes:
– These limits apply by trade or business.
– They push larger partnerships and S corporations to keep solid payroll records and fixed asset schedules.
– Correct basis figures can materially affect the allowed deduction, especially for family firms passing property across generations.

Who Can (and Cannot) Claim QBI

• Cannot claim QBI on wages: W‑2 employees are ineligible to claim QBI on wage income.
• Can claim QBI: self‑employed individuals and owners of pass-through entities, if their income meets the rules described above.
• Household effect: a household with both a W‑2 earner and a self‑employed spouse may still get a QBI deduction tied to the spouse’s qualified business income.

Practical Scenarios

Three common scenarios to illustrate impact:

1. New sole proprietor web designer
   • Earns $120,000 net income, buys a small server, pays no wages.
   • If single and below the threshold, likely able to claim the full 20% QBI deduction after allowed deductions.
2. Married couple running a neighborhood store
   • Reports $300,000 of QBI and pays W‑2 wages to staff.
   • May need to apply the wage/property test if taxable income crosses the joint threshold.
3. Partner in a consulting firm with suspended passive losses
   • Suspended losses are excluded from current QBI until allowed; when a portion becomes allowed, that amount enters QBI for that year.

For immigrant business owners planning multi‑year growth, the deduction can free up cash for hiring, rent, or equipment. It can also influence choices about entity type and compensation:
– S corporation owners must set reasonable compensation (which doesn’t count as QBI) while retaining profits that may qualify.
– Partnerships should structure partner pay thoughtfully since guaranteed payments don’t qualify.

Important takeaway: Owners who keep clean records by trade or business, match deductions to the right year, and use the IRS forms properly will be best positioned to claim the deduction in full.

Policy Status and Final Notes

• The deduction was made permanent through the One Big Beautiful Bill Act in late 2024, removing uncertainty about the original 2025 sunset.
• 2025 thresholds: $197,300 (single) and $394,600 (married filing jointly).
• Below these levels the deduction is generally straightforward: 20% of QBI plus 20% of qualified REIT/PTP income, subject to the overall taxable income limit.
• For SSTBs, the exclusion only applies once taxable income rises above the thresholds—so many professionals can still claim QBI when staying under the caps.

The bottom line for 2025 is steady: QBI remains available, definitions and exclusions are familiar, and thresholds are updated for inflation. Owners who maintain organized records, match deductions properly, and follow IRS guidance will be best positioned to benefit from the deduction.