Q: What is the QBI Deduction?

The Qualified Business Income (QBI) deduction—sometimes called the Section 199A deduction—lets eligible pass-through business owners deduct up to 20% of their qualified business income. It was introduced by the Tax Cuts and Jobs Act (TCJA) and is scheduled to expire after 2025 unless extended by Congress. In essence, it is a round about way to lower tax rates on business earnings.

For high-income entrepreneurs, real estate professionals, and closely held business owners, understanding how QBI works—and when it doesn’t—can mean the difference between a 29.6% top tax rate or a 37% rate on your business income.

Let’s break it down.

What Is the QBI Deduction?

If you own a sole proprietorship, partnership, S corporation, or certain trusts and estates, you may be eligible to deduct up to 20% of your net qualified business income. This effectively reduces the top federal tax rate on eligible business income from 37% to 29.6%.

But not all income qualifies—and not all taxpayers get the full 20%. The deduction is subject to limitations based on:

• W-2 wages paid by the business,

• Qualified property held, and

• Whether the business is a Specified Service Trade or Business (SSTB) like law, medicine, consulting, or financial services.

C-Corporations Don’t Get the QBI Deduction

This deduction only applies to pass-through businesses. C-corporations are taxed at a flat 21% corporate rate and do not qualify for the QBI deduction.

However, C-corp income is double-taxed: once at the corporate level (21%) and again when dividends are paid to shareholders (up to 23.8%). That brings the effective rate close to 39.8% on distributed income—higher than even the top pass-through rate without QBI. Don't count out C-corps if you are looking to capitalize on section 1202, but QBI works against the rationale of choosing S-corp. See more here.

How S-Corp Salaries Affect the QBI Deduction

When you operate as an S-corporation, your business income is split between:

1. W-2 wages (your salary) – subject to payroll taxes and not eligible for the QBI deduction.

2. Remaining profit – potentially eligible for the 20% QBI deduction.

The less you take in salary, the more QBI-eligible profit remains. But it has to be reasonable compensation—which is why it’s critical to set that number as low as defensibly possible based on IRS guidelines.

Let’s look at an example:

Example: $300,000 in S-Corp Net Income

Scenario	Salary	Profit	QBI Deduction (20% of Profit)	Estimated Tax Savings (at 37%)
A: Low Salary	$100,000	$200,000	$40,000	$14,800
B: High Salary	$200,000	$100,000	$20,000	$7,400

By reducing salary from $200,000 to $100,000—assuming it’s still within a defensible range—the business owner doubles their QBI deduction and saves over $7,000 in taxes.

This is why we always recommend doing a formal salary study. It’s not a balancing act anymore—it’s about hitting the lowest number you can justify. We help business owners across industries lock in that number.

Book a call with us and we’ll run a custom analysis to make sure you're not leaving money on the table.

Takeaways

• The QBI deduction can reduce your tax rate on business income to 29.6%, but only if you qualify.

• If you operate as an S-corp, the salary vs. distribution mix directly affects how much QBI you have.

• Strategic salary planning—supported by documentation and industry benchmarks—is essential to getting the most from QBI while staying compliant.

If you’d like a detailed QBI optimization analysis for your business—or need help navigating salary planning in an S-corp—Book a call. We help business owners make the tax code work in their favor.