The Qualified Business Income (QBI) deduction, commonly referred to as the Section 199A deduction, allows many owners of pass-through businesses to deduct up to 20 percent of their qualified business income on their individual federal income tax return. It was originally enacted as part of the Tax Cuts and Jobs Act of 2017 and later made permanent by the One Big Beautiful Bill Act (OBBBA), providing greater long-term certainty for business owners.

Unlike many deductions, you do not have to itemize deductions to claim it. The QBI deduction is generally available whether you claim the standard deduction or itemize.

Whenever Congress changes the tax law, there is usually a policy objective behind it.

When corporate tax rates were substantially reduced in 2017, lawmakers recognized that millions of small businesses do not operate as C corporations. Instead, they operate as:

These businesses are commonly called pass-through entities because their profits "pass through" to the owners' personal tax returns.

Congress wanted these businesses to receive meaningful tax relief as well. The QBI deduction was designed to help level the playing field by allowing qualifying business owners to retain more of their earnings for reinvestment, hiring employees, purchasing equipment, or simply improving cash flow.

This is one of the first questions to ask as a business owner.

Generally speaking, you may qualify if you earn income from:

Not every business automatically qualifies though. Higher income taxpayers may become subject to additional wage, property, and business types of limitations, particularly if they operate a specified service trade or business (SSTB), such as accounting, consulting, law, or financial services.

The primary authority is:

Internal Revenue Code Section 199A (26 U.S.C. §199A)

The IRS also provides guidance through:

Most taxpayers with relatively straightforward situations use Form 8995, while more complex situations generally require Form 8995-A.

Let's consider a simplified example.

Suppose Sarah owns a landscaping business operating as an LLC taxed as a sole proprietorship.

Her business reports:

If she qualifies for the full deduction, a 20% QBI deduction could reduce her taxable income by approximately $24,000, subject to the applicable limitations.

The exact deduction depends upon taxable income, filing status, wages paid, qualified property, and several other factors, but the example illustrates the purpose of the deduction: allowing entrepreneurs to keep more of what they earn. Here are some instructions that explain it more in depth.

Many farms operate as sole proprietorships, partnerships, family LLCs, or S corporations. Because these are generally pass-through entities, many farmers may also qualify for the deduction.

Agriculture often experiences fluctuating income from year to year. Proper tax planning may help farmers manage taxable income, equipment purchases, depreciation, and entity structure in ways that work together with the QBI deduction rather than against it. Refer to Publication 225 (2025), used to prepare 2025 tax returns filed during 2026.

Publication 225 (2026), will be released later and will be used to prepare 2026 tax returns filed during 2027.

This is one area where many investors become confused.

Owning rental property does not automatically qualify someone for the QBI deduction.

Instead, the rental activity generally must rise to the level of a trade or business under Section 162, or otherwise satisfy applicable IRS guidance, including certain safe-harbor provisions where appropriate. Factors such as the level of activity, recordkeeping, and management responsibilities can become important.

For investors with multiple rental properties, discussing entity structure and recordkeeping with a qualified tax professional before year end may produce better long-term results than waiting until tax season.

Many tax-saving opportunities disappear once the calendar year ends.

If you're considering:

Those decisions are generally more valuable before closing your book on December 31 than after.

The QBI deduction begins with accurate business income.

Incomplete bookkeeping can make it difficult to calculate qualified business income correctly. Organized financial records also make year-end tax planning significantly more effective.

Assuming every LLC automatically qualifies.

An LLC is simply a legal structure. Qualification depends upon how the business is taxed and whether it meets the requirements of Section 199A.

Waiting until tax season.

Many QBI planning opportunities occur before the end of the year. Once the return is being prepared, many planning options have already passed.

It reflects Congress's ongoing effort to encourage entrepreneurship, investment, family businesses, and economic growth. Whether you own a farm, operate a construction company, manage rental properties, or run a small consulting business, understanding how this deduction works may allow you to legally reduce your taxable income and retain more capital to reinvest in your business.

Every business owner's situation is different, and the rules surrounding Section 199A can become complex as income increases. That is why proactive planning often produces better results than reactive tax preparation.

To learn more, contact The Smith Advisory LLC at [email protected]. A little planning today may help you keep more of what you've worked so hard to earn.