The qualified business income (QBI) deduction, also known as the “20% business income deduction,” allows many pass-through business owners to deduct up to 20% of their qualifying business income on their federal tax return. As Albuquerque CPA Jim Hamill explains, “The basic deduction is 20% of the income earned from the business.”

Although the main number is straightforward, the actual deduction depends heavily on taxable income and whether the business is considered a specified service trade or business (SSTB). This category can sharply limit the deduction for higher earners.

Hamill notes that recent tax law changes made the deduction permanent, even though it was originally set to end after 2025. The new rules also expanded the income range before the deduction phases out completely.

The core mechanics: taxable income drives the result

One important detail is that the thresholds are based on taxable income, not adjusted gross income (AGI). Hamill points out that taxable income is calculated after subtracting deductions, such as the standard deduction or itemized deductions. This means two people with the same business profit could end up on different sides of the threshold, depending on the rest of their tax return.

If taxable income is below the threshold, the deduction is usually 20% of qualified business income, subject to certain technical exceptions. If taxable income exceeds the threshold, the deduction can be reduced, sometimes to zero.

A mid-range example: how the phaseout bites

Hamill uses a simple example to show how the rules work:

• If qualified business income is $100,000, the “in general” deduction would be $20,000.
• For married couples, if taxable income reaches the top of the phaseout range in his example ($544,600), the deduction can drop to zero.
• If taxable income is halfway through the range (Hamill uses $469,600), the deduction is usually reduced by half. In his example, it drops from $20,000 to $10,000.

The wage-and-capital lever: why payroll can matter

Once income exceeds the threshold, the rules may still allow a deduction based on W-2 wages paid by the business or on depreciable assets it uses. Hamill notes that the deduction cannot go below certain limits tied to wages or capital. This means that paying W-2 wages can help keep a partial deduction, even at very high taxable income levels.

In his example, a taxpayer at the top of the phaseout range who pays $20,000 in W-2 wages could still claim a $10,000 deduction, which is 50% of those wages, even if taxable income is much higher.

SSTBs: the extra limits high earners face

For SSTBs, which Hamill says include fields like accounting, law, health care, and consulting, the phaseout is stricter. Once taxable income goes over the threshold, an “applicable percentage” reduces not only the deduction, but also the amounts of income, wages, and capital used to figure it. At the top of the phaseout range, this percentage can reach 100%, wiping out the deduction.

Hamill’s midpoint example shows the impact. An SSTB with the same $100,000 of income and $20,000 of W-2 wages, halfway through the phaseout, gets a $5,000 deduction. That is half of the non-SSTB result in his example.