QBI Deduction Explained: How Small Businesses Can Save on Taxes in 2025

Do you own a small business, function as an independent contractor, or freelancer? If you do, you most likely have heard of the QBI deduction. You may also be wondering what it means and how it can help you save money on your taxes. The good news is that the QBI deduction can be a powerful tool to lower your taxable income,(and reduce what you owe to the IRS). Let us break it down in simple terms so you can understand how it works and whether you qualify for it. Flexkeeper helps small businesses and entrepreneurs understand what works best for their financial situation.

What Does QBI Stand For?

Eligible taxpayers can reduce their taxable income by up to 20% of their qualified business income (QBI) through the QBI deduction, a tax benefit. Where did it come from? It was introduced as part of the Tax Cuts and Jobs Act of 2017. This deduction is sometimes called the Section 199A deduction because that is the section of the tax code it falls under. The Big Beautiful Bill introduced by President Trump in 2025 extended the tax cut indefinitely (it was set to expire in 2025).

Who Qualifies For The QBI Deduction?

It’s good to understand if you qualify for the QBI deduction to help improve your bottom line. Not every type of business qualifies for this deduction, but many do. You may qualify if you operate as one of the following:

Sole proprietor
Partnership
S corporation shareholder
Some trusts and estates

Generally, you can qualify if you own your own business and you’re not a typical W2 employee. However, there are some limits based on your income level and the type of business you run. If your taxable income is below a certain threshold, you can take the full deduction no matter what kind of business you have. For 2025, the threshold is about 200,000 dollars for single filers and 400,000 dollars for joint filers

If your income is above these thresholds, that is when it gets a little more confusing. Your eligibility may depend on whether your business is considered a specified service trade or business. This includes fields like law, health, accounting, consulting, athletics, and financial services. If you are in one of those fields and over the income limit, your deduction may be reduced or eliminated. Expert tax professionals can help answer questions that you are unsure about or to see if you qualify.

How Much Can I Deduct?

A QBI deduction can be up to 20 percent of your qualified business income. For example, if your QBI is 60,000 dollars, you could potentially deduct up to 12,000 dollars from your taxable income. The deduction cannot exceed 20 percent of your total taxable income minus any capital gains. The IRS uses the lower of the two numbers when calculating your deduction. If your income is above the threshold, then wage and asset tests may apply. These calculations can get a little complicated, but they are designed to prevent high earners from using the deduction unfairly. Again, don’t try to figure out everything by yourself. Work with someone who has experience working with this type of need.

What Are The Benefits Of The QBI Deduction?

Other than getting a solid reputation in your service area, it’s assumed most business owners want to keep their hard-earned money. It helps small business owners keep more of what they earn. It acts almost like a reward for being self-employed and taking on the risks of running a business.

Let’s explore some of the reasons below in more detail.

Reduces Taxable Income

Reducing your taxable income can help you reinvest into your business for long-term growth. That means you could drop into a lower tax bracket or simply owe less overall. It can be difficult (especially for newer businesses) to have profitability without understanding how to use tax deductions

Encourages Entrepreneurship

The QBI deduction was created in part to encourage people to start and maintain their businesses. With the chance to save on taxes, it provides some relief and incentive for self starters. The QBI deduction is part of the tax savings that help you achieve greater success in the long run.

Keeps More Money In Your Pocket

Tax savings can be reinvested into your business, used to save for retirement, or just kept as a cushion. Keeping more of what you earn gives you greater flexibility and control. It can be incredibly challenging to stay above water when you don’t have any way to put more money back into your business. This is almost like a “safety net.”

Real World Example: How a Small Business Can Use the QBI Deduction

Let’s say Sarah runs a small graphic design studio on her own. After covering her business expenses, she makes about 90,000 dollars in income. With the QBI deduction, she can take 20 percent off that amount when figuring out how much she owes in taxes. She might be able to deduct around 18,000 dollars. This lowers her taxable income and helps her keep more of her money. She can then use those savings to invest in better equipment or bring on a part-time assistant. The QBI deduction is a great way for small business owners like her to hold on to more of what they earn.

Are There Any Limitations Or Things To Watch Out For?

Yes, there are a few limitations and rules you should know about:

If your business has a loss in a given year, you cannot claim the deduction and that loss may carry forward to affect future QBI deductions
You must file as an individual or other eligible entity, not as a corporation
Specified service businesses may face reduced or no deduction at higher income levels

Final Thoughts

The QBI deduction is one of the most helpful tax breaks available to small business owners, freelancers, and independent contractors. If you qualify, it can significantly reduce your taxable income and help you keep more of your hard-earned money. While the rules can get a bit complicated for higher earners or certain professions, the majority of self-employed individuals can benefit from this deduction with just a little bit of planning and recordkeeping.

Do you need help understanding if your business can qualify for the QBI deduction or do you need help understanding your tax situation further? At Flexkeeper, we help you navigate the ever-changing (and sometimes complex) world of tax preparation for business or if they need help with their financial planning. Don’t hesitate to contact us to learn more about how we can help!