Nobody likes paying hefty amounts of their hard-earned money as taxes. If you are also a small business owner who doesn’t enjoy paying taxes but thinks there’s no way out, think again. Qualified Business Income (QBI) deduction is a tax deduction that can actually help you save on the bonus bucks by offering small business tax relief. Want to know how? In this article, we will answer all your queries by exploring what QBI is, why it matters, and how to claim it. Let’s begin.
Understanding the QBI Deduction – The Easy Way
Qualified Business Income is the income you get from your qualified business, after eliminating all the expenses and income investments. With that said, QBI deduction is a deduction you can claim on your taxable income that lets you save your hard-earned money. As per section 199A deduction, you can legally claim up to 20% QBI deduction on your taxes.
However, it is to be noted here that QBI deduction is only applicable to those who run a qualified small business or are self-employed. This means the deduction would not be relevant to you if you have a large-scale, SSTB, unqualified business or if your income is high.
Why the QBI Deduction Matters?
QBI deductions can be a helpful boost to ensure small business tax relief. The following are a few reasons why they can be helpful for your business. Let’s have a look:
Reduces Taxable Income
The main reason why QBI deduction can be a big win for your business is that it can help you reduce your taxable income. Many small business owners struggle to pay hefty taxes, particularly if they are not earning much. QBI deduction helps such businesses operate better by lowering the taxable income and helping save more.
Supports Growth
Business growth is another major reason why you should claim the QBI deduction. Think of it this way: if you are saving money by reducing your taxable income, you can invest the pocketed funds into better opportunities that can ultimately help your business thrive.
Encourages Entrepreneurship
QBI deductions can encourage entrepreneurship. By saving money, you can hire more staff, buy better equipment, and expand your products, which can surely help you compete with your market opponents more efficiently.
How to Claim the QBI Deduction (Step-by-Step)
Many business owners struggle to claim QBI deductions. But we are here to simplify it all for you in 5 easy steps.
Step 1: Identify Your Business
Only certain business types are eligible for QBI deductions, such as LLC, S-Corp, Partnership, and Sole Proprietors. The first step is hence to identify whether your business is a pass-through entity or not. Keep in mind, if you are working in SSTBs as a lawyer, doctor, accountant, consultant, artist, or performer, the QBI deduction might minimize or might not be applicable at all.
Step 2: Calculate Your QBI
After identifying your business type, the next step involves calculating your qualified business income. You can follow an easy formula to do so. Take the total revenue of your business and subtract all the business expenses from it, such as rent, salaries, supplies, etc. The outcome you get will be your QBI.
Step 3: Compare Your Income to IRS Limits
Once you have calculated your QBI, check if it is within the IRS limits. If your income is less than the limit, you can claim a full deduction. However, if it exceeds the limit, the deduction may be reduced. For the year 2025, the income threshold amounts $394,600 for married filing jointly and $197,300 for other filers.
Step 4: Consider W-2 Wages and Business Property
If your small business is bringing you a high income, you need to maintain proper accounts for the wages you pay to your employees and the kind of property your business owns. These can sometimes affect the amount of deduction you get. Always make sure you have everything documented beforehand so you don’t miss out on an extra deduction.
Step 5: Fill Out the Right IRS Form
After doing all that needs to be done, the last step is to fill out the right IRS form. You can use Form 8995 for simple cases and Form 8995-A for complex ones. Using these forms, you can report your deductions to the IRS. Remember to cross-check everything before you submit to avoid IRS issues later on.
Common Mistakes To Avoid
Being a leading tax group in the U.S., we deal with many small business owners who come to us after they mishandle their QBI deductions. Drawing on our experiences, here are some common mistakes you must avoid when claiming your QBI deductions.
- Counting your personal income as your business income when calculating QBI
- Choosing the wrong IRS form
- Neglecting the IRS limits and ultimately overclaiming
- Losing track of the employee wages and the business property rule
By avoiding these mistakes, you can steer clear of IRS complications in the future.
Pro Tips 101 – Backed By Industry Experience
With many years of practical experience in the tax field, there are a couple of tips we’d like to share with you so you have a hassle-free experience with QBI deductions. The first and foremost tip is to always keep all your records organized. It can not only help you document everything correctly but also save you from additional efforts at the very last moment. Apart from this, try to plan your income carefully so you stay under the limit as much as possible. Remember, staying within the IRS limit is the key to claiming the maximum deduction.
Being a business owner, you may find it challenging to claim QBI deductions on your own. Never hesitate to seek help from a professional. The tax rules keep changing, so always check in with an expert to stay updated. However, make sure you choose the right tax partner to have a trouble-free experience.
How to Choose the Right Tax Partner for QBI Deduction
Choosing the right tax partner makes all the difference. However, it can sometimes be confusing, particularly as there are hundreds of experts offering their services. Before you opt for a tax expert, make sure they are experienced in working with small businesses, offer personalized help, and have positive client reviews online.
At H&M Tax Group, we are a team of experienced tax professionals dedicated to helping small businesses with their tax needs. We have thousands of satisfied clients across the country who trust us to handle their tax challenges. Updated with the latest rules for the section 199A deduction, we can be your top choice for maximizing QBI deductions.
Final Thoughts
Qualified business income deduction can help you save extra bucks by claiming up to a 20% deduction on your taxable income. To claim QBI deductions, your business must be qualified and must fall in the eligible category. In addition, your income must also be under the established IRS limits, as exceeding the limits may minimize or fully exempt your deductions. If managing all this is challenging for you, rely on us at H&M Tax Group to be your trusted tax partner through it all.