QBI Deduction (§199A) Checklist — 2025 Guide for Pass-Throughs & Entrepreneurs

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QBI Deduction (§199A) Checklist — 2025 Guide for Pass-Throughs & Entrepreneurs

The Qualified Business Income (QBI) deduction continues to be one of the most valuable tax benefits for freelancers, small business owners, and pass-through entities in 2025.
With the OBBBA Act making most TCJA provisions permanent, the §199A rules have stabilized — but complexity remains. This guide walks through who qualifies, how the thresholds work, and what to review before filing.

📑 Contents

  • 1️⃣ Who qualifies for the QBI deduction
  • 2️⃣ 2025 taxable-income thresholds and SSTB limits
  • 3️⃣ W-2 wage and UBIA tests simplified
  • 4️⃣ Forms and computation overview
  • 5️⃣ Ten-point checklist for accurate filing
  • 6️⃣ Real-world examples (2025)
  • 7️⃣ Quick FAQs

1️⃣ Who qualifies for the QBI deduction

The §199A deduction applies to income from sole proprietorships, partnerships, S-corporations, and some trusts/estates.
It generally allows a 20% deduction on qualified business income from U.S. sources.
C-corporations and employees are not eligible.

  • Applies at the individual level — not at the entity level.
  • Only income effectively connected with a U.S. trade or business qualifies.
  • QBI excludes capital gains, dividends, and interest (except business-related interest).

2️⃣ 2025 taxable-income thresholds and SSTB limits

In 2025, the phase-in limits remain indexed for inflation: $197,300 (Single) and $394,600 (Married Filing Jointly).
If taxable income stays under these thresholds, you receive the full 20% deduction.
Beyond that range, the deduction is limited — especially for Specified Service Trades or Businesses (SSTBs) such as legal, accounting, consulting, and medical practices.

💡 Example:
A married couple running a law practice earns $410,000 in taxable income.
They fall inside the SSTB phase-out range, meaning part of the QBI deduction disappears.
A pre-year-end retirement contribution or charitable bunching could bring them below the limit.

3️⃣ W-2 wage and UBIA tests simplified

For taxpayers above the threshold, the deduction is capped by either:

  • 50% of W-2 wages paid by the business, or
  • 25% of W-2 wages plus 2.5% of the unadjusted basis immediately after acquisition (UBIA) of qualified property.

These rules encourage proper payroll and asset tracking. For S-Corps, “reasonable compensation” to owner-employees is critical — too low and the IRS may reclassify income, too high and you reduce QBI.

4️⃣ Forms and computation overview

  1. Identify QBI: net income, less adjustments (half of self-employment tax, health-insurance deductions, etc.).
  2. Check threshold: use Form 8995 for simple cases, Form 8995-A for high-income or multi-business filers.
  3. Apply wage/property test: above-threshold businesses compute limits using W-2 and UBIA data.
  4. Claim: report on Form 1040; deduction reduces taxable income but not AGI.

5️⃣ Ten-point checklist for accurate filing

  • ☑️ Separate each trade or business when calculating QBI.
  • ☑️ Verify whether your activity is an SSTB under IRS definitions.
  • ☑️ Confirm taxable income thresholds by filing status.
  • ☑️ Reconcile guaranteed payments — they are not QBI.
  • ☑️ For S-Corps, test reasonable comp levels with market data.
  • ☑️ Track UBIA of fixed assets — don’t omit fully-depreciated property still in service.
  • ☑️ Aggregate or de-aggregate businesses properly (once elected, consistency required).
  • ☑️ Check QBI loss carryforwards from prior years.
  • ☑️ Include REIT/PTP income separately — also eligible for 20% deduction.
  • ☑️ Attach supporting schedules; IRS scrutiny for §199A remains high.

6️⃣ Real-world examples (2025)

Example A — Graphic designer (non-SSTB)

  • Taxable income $180,000 → fully under the threshold.
  • QBI $120,000 → Deduction $24,000 (20%).
  • Files Form 8995 (simplified).
Example B — Engineering S-Corp (non-SSTB, above threshold)

  • Taxable income $520,000 (MFJ).
  • W-2 wages $220,000 → QBI $300,000.
  • Deduction limited to min(20% × $300,000 = $60,000, 50% × $220,000 = $110,000) → $60,000 allowed.

7️⃣ Quick FAQs

  • Does investment income qualify? No — capital gains, dividends, and most interest do not.
  • Are guaranteed payments QBI? Generally no, they are excluded from qualified income.
  • Can rental income qualify? Yes, if it rises to the level of a trade or business or under the safe harbor test.
  • What if I exceed the threshold? Apply W-2/UBIA tests and phase-outs; plan contributions or timing to manage income.

🔗 Official References

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