What is QBI?
Most business owners with pass-through income qualify for a 20% federal deduction — and most never take full advantage of it.
The Qualified Business Income (QBI) deduction was created by the Tax Cuts and Jobs Act of 2017. When Congress lowered the corporate tax rate to 21%, it added a parallel break for small businesses: a 20% deduction on qualified income from Schedule C filers and pass-through entities. The opportunity is real. The rules are specific.
Before you assume you qualify, you need to understand the income thresholds, the wage limitations, and the planning moves that determine how much of the deduction you actually capture.
What Is the QBI Deduction?
The QBI deduction allows eligible business owners to deduct 20% of their qualified business income from their taxable income. It applies to sole proprietors, S-Corp shareholders, partners in partnerships, and other pass-through entities — not C-Corps.
For 2023, the phase-out threshold begins at $364,000 for married filers and $182,000 for single or head of household. Below those thresholds, the deduction is straightforward: 20% of QBI.
How the Wage Limitation Works Above the Threshold
If your taxable income exceeds the threshold, you can deduct the lesser of:
- 20% of QBI, or
- 1/2 of W-2 wages paid by the business, or
- 1/4 of W-2 wages + 2.5% of the unadjusted basis of qualified property (relevant for real estate professionals)
A straightforward example: a married S-Corp owner with $300,000 in net business income after paying employees can deduct $60,000. The wage limitation adds a layer of complexity for higher earners — which is where planning matters most.
How to Maximize Your QBI Deduction
1. Reduce Taxable Income for SSTB Businesses
If you're approaching the phase-out threshold, reducing taxable income before year-end preserves the deduction. This works best in a single-employee S-Corp or closely held partnership. Retirement contributions are one of the most effective levers.
2. Make Employee-Side Deferrals First
Because owner W-2 wages are excluded from QBI, prioritize employee deferrals into a 401(k) before employer contributions. This is more tax-efficient given the QBI framework.
3. Reconsider SEP IRA Contributions
If you're already capturing a 20% QBI deduction, SEP contributions deliver less bang than they appear to. Any contribution made to a SEP or profit-sharing plan reduces QBI by the full contribution amount — but you're only deducting 80 cents of every dollar contributed (after the 20% QBI deduction). Then you pay full tax on withdrawals. The math often favors other vehicles first.
4. Aggregate Qualifying Businesses
If you own multiple businesses with common ownership and management, aggregating them under one QBI calculation can significantly simplify optimization. It prevents you from having to optimize entity by entity, and may increase the deduction across the combined group.
Work With a Team That Plans For QBI
Optimizing QBI isn't a one-time calculation. It's a planning posture — one that requires knowing your income trajectory, your entity structure, and your retirement contribution timing before December 31.
Visor works with business owners who want to capture every dollar they're entitled to. If you want to understand how QBI applies to your specific situation, schedule a consultation with the Visor team.
