Qualified Business Income Deduction

A tax deduction for eligible business income.

QUICK ANSWER

The Qualified Business Income Deduction allows eligible business owners to deduct up to 20% of their qualified business income, reducing taxable income.

In depth

The Qualified Business Income Deduction, introduced under US tax law, allows owners of pass-through entities such as sole proprietorships and partnerships to deduct up to 20% of qualified business income. Eligibility depends on income thresholds, business type, and wage or capital limitations. This deduction reduces taxable income rather than tax directly, making it valuable for founders. It is commonly used by early-stage businesses structured as pass-through entities to lower overall tax liability.

Example

Let’s consider a real-world example of a startup founder claiming this deduction.

Qualified business income: $200,000

Deduction = 20% × $200,000 = $40,000

Taxable income after deduction = $200,000 – $40,000 = $160,000

This reduces the total tax owed by lowering the taxable base.