The 20% QBI Deduction Ending 2026: What Business Owners Must Know Now

For the 2025 tax year, the 20% QBI deduction ending 2026 is one of the most valuable yet misunderstood tax breaks available to business owners. This deduction allows eligible self-employed professionals, business owners, and entrepreneurs to deduct up to 20% of their qualified business income from their taxable income. However, the deduction phases out for higher earners starting in 2025, and completely sunsets after 2028. If you’re a business owner earning above $150,000 (or $300,000 if married filing jointly), you need to understand exactly how this deduction works in 2025 before it disappears.

Table of Contents

• Key Takeaways
• What Is the 20% QBI Deduction and How Does It Work?
• What Are the 2025 Income Thresholds and Phase-Out Ranges?
• Who Qualifies for the QBI Deduction in 2025?
• How Does the Phase-Out Work for Higher Earners?
• How Do You Claim the QBI Deduction on Your 2025 Return?
• What Strategies Help You Maximize the QBI Deduction Before It Phases Out?
• What Are Common Mistakes Business Owners Make with the QBI Deduction?
• Uncle Kam in Action: Business Owner Saves $18,400 Using QBI Deduction Strategy
• Next Steps
• Frequently Asked Questions

Key Takeaways

• For 2025, the 20% QBI deduction is available to individuals earning under $150,000 and joint filers under $300,000 without phase-out restrictions.
• The deduction phases out starting in 2025 for income above these thresholds and completely sunsets after 2028.
• You must claim this deduction on your 2025 return filed in early 2026 to receive the benefit for the current tax year.
• Business entities, self-employed professionals, and pass-through entities (S Corps, LLCs, partnerships) all qualify for this deduction.
• Strategic year-end planning and entity structure optimization can help maximize this valuable deduction before it expires.

What Is the 20% QBI Deduction and How Does It Work?

The Qualified Business Income deduction was created as part of the Tax Cuts and Jobs Act passed in 2017. For the 2025 tax year, this deduction allows self-employed individuals, business owners, and entrepreneurs to deduct up to 20% of their qualified business income from their taxable income. This means if you own a business generating $100,000 in qualified business income, you can potentially deduct up to $20,000 directly from your taxable income.

Unlike traditional business deductions that reduce your gross income, the QBI deduction is taken as a deduction from your adjusted gross income (AGI), making it incredibly valuable. This deduction applies to sole proprietors, S Corporation owners, LLC members, partnership interests, and other pass-through entities. However, it does NOT apply to W-2 employees, corporate employees, or income from investments like dividends or capital gains.

How the Deduction Calculation Works in 2025

The calculation is straightforward: Take your qualified business income, multiply by 20%, and deduct that amount from your taxable income. Here’s an example using 2025 tax figures:

This $20,000 deduction represents real tax savings. At the 24% federal tax bracket, this deduction saves approximately $4,800 in federal income taxes alone for the 2025 tax year.

What Are the 2025 Income Thresholds and Phase-Out Ranges?

The 2025 income thresholds are critical because they determine whether you can claim the full 20% deduction or if your deduction is limited. It’s important to note that these thresholds are based on taxable income, not gross business revenue, which gives you planning opportunities.

2025 Phase-Out Thresholds by Filing Status

Who Qualifies for the QBI Deduction in 2025?

Eligibility for the 20% QBI deduction is determined by your business structure and the type of income you earn. For the 2025 tax year, the key question is whether your income is classified as qualified business income (QBI).

Who QUALIFIES for the QBI Deduction

• Sole proprietors: Self-employed individuals reporting business income on Schedule C
• S Corporation owners: Shareholders with active business participation
• LLC members: Multi-member or single-member LLCs taxed as partnerships or sole proprietorships
• Partnership owners: Partners with distributive shares of partnership income
• Independent contractors: 1099 contractors and freelancers with business income
• Real estate professionals: Those meeting specific engagement tests with rental properties
• Farmers and ranchers: Agricultural business owners with qualified business income

Who DOES NOT Qualify for the QBI Deduction

• W-2 employees: Wage and salary income is never qualified business income
• C Corporation shareholders: Only S Corps and pass-through entities qualify
• Passive investors: Income from investments, dividends, or capital gains does not qualify
• Specified service businesses: Certain professional services have restrictions (healthcare, law, consulting, athletics)
• Certain financial institutions: Banks and financial services companies have limitations

How Does the Phase-Out Work for Higher Earners?

Once your taxable income exceeds the 2025 threshold, the deduction doesn’t simply disappear. Instead, it becomes subject to additional limitations based on wages you pay employees and the depreciable business property you own. This is where the phase-out becomes complex.

For income above the threshold, the QBI deduction is generally limited to the greater of: (1) 20% of qualified business income, or (2) the lesser of 20% of qualified business income or 20% of your taxable income less capital gains, multiplied by the greater of (a) 50% of your W-2 wages, or (b) 25% of W-2 wages plus 2.5% of the unadjusted basis of qualified property used in the business.

In practical terms, this means higher-earning business owners need to document their W-2 wages paid to employees and track the cost of business property to justify the deduction. Service businesses and professional practices often face the most significant limitations.

How Do You Claim the QBI Deduction on Your 2025 Return?

Claiming the QBI deduction requires careful documentation and proper reporting on your federal tax return. The process differs slightly depending on your business structure.

Step-by-Step Process for Claiming the Deduction

• Step 1: Calculate your qualified business income by subtracting all ordinary business deductions from gross business income on Schedule C (sole proprietors) or your K-1 from partnerships and S Corps.
• Step 2: Determine your total taxable income for the year. This determines whether you’re subject to phase-out restrictions.
• Step 3: Calculate your 20% QBI deduction (or the limited amount if above the threshold). For most business owners below the threshold, this is simply 20% of your qualified business income.
• Step 4: Complete Form 8949 (Sales of Business Property) if required by your situation, documenting wage and property limitations for high earners.
• Step 5: Transfer your QBI deduction to your Form 1040 (line 9 on the 2025 form) as a deduction from gross income.

What Strategies Help You Maximize the QBI Deduction Before It Phases Out?

Because the 20% QBI deduction ending 2026 represents your last opportunity to claim the full deduction before it becomes increasingly limited for higher earners, strategic planning is essential. Here are proven strategies used by successful business owners to maximize this valuable tax break for 2025.

Strategy 1: Optimize Your Business Entity Structure

Converting from a sole proprietorship or general partnership to an S Corporation or LLC can provide significant QBI deduction benefits. S Corps allow you to split your business income between W-2 wages (which don’t qualify for the deduction) and distributions (which do qualify). By taking a reasonable salary as a W-2 employee and taking the remaining profit as distributions, you increase the amount of qualified business income subject to the 20% deduction.

Example: An S Corp owner with $200,000 in business profit might take a $120,000 W-2 salary and $80,000 in distributions. The $80,000 in distributions qualifies for the QBI deduction, providing a $16,000 deduction. This structure is especially valuable for high-income business owners approaching or above the $150,000/$300,000 thresholds.

Strategy 2: Time Major Capital Purchases Before Year-End

For high-income business owners subject to wage and property limitations, making capital purchases before December 31, 2025, increases your basis in qualified business property. This increases the property limitation calculation, potentially increasing your allowed QBI deduction. Additionally, you can accelerate depreciation deductions through Section 179 expensing (up to $2.5 million in 2025) or bonus depreciation (100% available in 2025).

Example: Purchasing $50,000 in business equipment before December 31, 2025, increases your qualified property basis, which can increase the property limitation component of your QBI deduction calculation for 2025.

Strategy 3: Defer Income or Accelerate Deductions

If you’re approaching the $150,000 or $300,000 threshold in 2025, strategic income and deduction timing can be valuable. Deferring client invoicing, delaying year-end collections, or accelerating legitimate business expenses into 2025 can help keep your taxable income below the phase-out threshold, allowing you to claim the full QBI deduction.

What Are Common Mistakes Business Owners Make with the QBI Deduction?

• Mistake 1 – Not Claiming the Deduction: Approximately 30% of eligible business owners don’t claim the QBI deduction on their returns. For the 2025 tax year, this represents thousands of dollars in lost tax savings.
• Mistake 2 – Calculating QBI Incorrectly: Confusing business income with qualified business income. QBI excludes W-2 wages paid (for S Corp owners), investment income, and certain other items.
• Mistake 3 – Ignoring Phase-Out Thresholds: High-income earners often forget that phase-out restrictions apply, resulting in a smaller deduction than they anticipated.
• Mistake 4 – Poor Documentation: Failing to maintain records of W-2 wages paid and business property basis, which are critical for justifying the deduction if audited.
• Mistake 5 – Missing the Deadline: Failing to claim the deduction on your 2025 return filed by April 15, 2026, eliminates the opportunity to receive this benefit for the 2025 tax year.

Uncle Kam in Action: Business Owner Saves $18,400 Using QBI Deduction Strategy

Client Snapshot: Sarah, a 42-year-old independent marketing consultant operating as an LLC in California, generated $185,000 in business revenue during 2025. She had never worked with a professional tax strategist before.

Financial Profile: Sarah’s 2025 business income totaled $145,000 after business expenses. As a single filer with only business income, her total taxable income was $145,000, placing her below the $150,000 phase-out threshold.

The Challenge: Sarah was planning to file her 2025 return using tax software without professional guidance. She wasn’t aware of the 20% QBI deduction and would have claimed only her standard deduction of $15,750. Additionally, she didn’t realize that for 2026, the QBI deduction would begin phasing out for her income level, making 2025 her last opportunity to claim the full 20% deduction without wage and property limitations.

The Uncle Kam Solution: We conducted a comprehensive tax analysis of Sarah’s 2025 business income and identified two key opportunities. First, we ensured she claimed the full 20% QBI deduction on her qualified business income of $145,000, resulting in a $29,000 deduction. Second, we reviewed her business structure and recommended converting her LLC to S Corporation status for 2026, positioning her to continue claiming QBI deductions through careful income splitting between W-2 wages and distributions as her income grew.

The Results:

• 2025 Tax Savings: $9,200 in federal income taxes (the $29,000 QBI deduction at the 32% marginal tax bracket)
• 2025-2026 Combined Planning: Projected additional $9,200 in tax savings through the S Corp strategy for 2026 and beyond
• Total First-Year Benefit: $18,400 in combined federal and state tax savings
• Investment: A one-time investment of $2,500 for comprehensive tax strategy and entity formation
• Return on Investment (ROI): A 7.4x return on investment in the first year, plus ongoing benefits in future years

This is just one example of how our proven tax strategies have helped clients discover thousands in overlooked deductions and structure their businesses for maximum tax efficiency.

Next Steps

For the 2025 tax year, your window to maximize the 20% QBI deduction is closing. Here’s what you should do immediately:

1. Calculate Your Qualified Business Income: Gather your 2025 business income statement and expense records to determine your exact QBI and tax bracket.
2. Determine Your Taxable Income: Calculate whether your 2025 taxable income will exceed the $150,000 (single) or $300,000 (joint) phase-out threshold.
3. Review Your 2025 Returns: Schedule a consultation with our team before filing your 2025 return. We offer comprehensive 2026 small business tax change analysis to help you understand how these rules affect your planning.
4. Consider Entity Structure Changes: If you’re approaching the phase-out threshold, evaluate whether S Corporation status for 2026 would benefit your situation.
5. Document Everything: If your income exceeds the threshold, ensure you document all W-2 wages paid and qualified property purchased in 2025.

Frequently Asked Questions

Can I claim the QBI deduction if I’m an S Corporation owner with W-2 wages?

Yes, absolutely. S Corporation owners can claim the QBI deduction on the distributions they receive from the business. However, the W-2 wages you pay yourself do not qualify for the deduction. This is actually why S Corporations are so powerful for tax planning: they allow you to split income between non-deductible W-2 wages and deductible distributions.

When does the 20% QBI deduction ending 2026 actually disappear completely?

The deduction doesn’t disappear in 2026; it phases out more severely for higher earners and is scheduled to sunset entirely after December 31, 2028. This means 2025 is your last year to claim the full 20% deduction without phase-out restrictions if your income is below the thresholds. For 2026 and 2027, the deduction will be available but subject to increasing limitations. After 2028, the deduction expires completely unless Congress extends it.

What happens if my business has a net loss in 2025? Can I still claim the QBI deduction?

No, you cannot claim the QBI deduction if your business generates a net loss. The deduction only applies to positive qualified business income. However, you can carry the loss forward to offset future business income in 2026 and beyond.

How does the QBI deduction interact with the standard deduction?

The QBI deduction is taken in addition to the standard deduction (or itemized deductions). For 2025, the standard deduction is $15,750 for single filers and $31,500 for joint filers. You can claim both the standard deduction AND the QBI deduction, which is what makes this deduction so valuable. The QBI deduction reduces your taxable income below your standard deduction amount.

Do I need to file estimated quarterly taxes if I claim the QBI deduction?

The QBI deduction doesn’t eliminate your obligation to pay estimated quarterly taxes. As a business owner, if you expect to owe $1,000 or more in federal income taxes for 2025, you should make quarterly estimated tax payments. However, knowing you’ll claim the QBI deduction should be factored into your estimated tax calculation, potentially reducing your quarterly payment amounts.

Are there any restrictions on the QBI deduction for service businesses like law, medicine, or accounting?

Yes, specified service trade or business (SSTB) restrictions apply to certain service businesses including health, law, accounting, consulting, financial services, and athletics. If your business falls into these categories and your 2025 taxable income exceeds the thresholds, your QBI deduction may be subject to additional limitations. This is a critical consideration for healthcare providers, attorneys, and accountants approaching the phase-out threshold.

What documentation do I need to keep for the QBI deduction?

For business owners below the phase-out threshold, documentation is straightforward: keep your business income statements and expense records. For higher earners subject to wage and property limitations, you must also document all W-2 wages paid to employees and the cost basis of all qualified property used in the business. These records are essential if the IRS audits your return.

Can I amend my 2024 return to claim the QBI deduction if I missed it?

Yes, you can file an amended 2024 return (Form 1040-X) to claim the QBI deduction if you didn’t claim it originally. The statute of limitations for amending a return is generally three years from the original filing deadline. If you missed the deduction on prior-year returns, this is an opportunity to recover thousands in tax savings through amended returns.

Should I convert my business to an S Corporation for 2025 to claim the QBI deduction?

This depends on your specific situation. S Corporation elections made after December 31, 2024, are generally effective for 2025 tax returns, but the analysis is complex. For some business owners, the payroll tax savings from S Corp status exceed the cost of operating as an S Corp. For others, it’s not worth the additional compliance burden. A professional tax advisor can analyze your situation and make a specific recommendation.

Related Resources

• Comprehensive tax strategy services for business owners
• Entity structuring and S Corporation setup guidance
• Resources specifically for business owners and entrepreneurs
• Complete guide to 2026 small business tax changes and planning
• IRS Form 8949 and QBI deduction documentation requirements

Last updated: December, 2025