At a glance
- What it is
- A federal deduction (Section 199A) of up to 20% of qualified business income from pass-through businesses.
- What it saves
- Federal income tax. It doesn’t reduce self-employment tax or Oklahoma income tax.
- Best fit
- S corp, partnership and sole prop owners.
- Main catch
- Above the income threshold, wage limits apply, and service businesses phase out.
- Status
- Made permanent by the July 2025 federal tax law.
Key takeaways
- The QBI deduction lets owners of S corps, partnerships, and sole proprietorships deduct up to 20% of qualified business income on their federal return.
- It fits profitable pass-through owners, especially service business owners near the income threshold where limits start.
- In the illustrative example, $120,000 of QBI produces a $24,000 deduction, worth about $5,280 in federal tax at a 22% bracket.
- The catch: above the threshold, wage limits apply and service businesses phase out, and it doesn’t reduce self-employment or Oklahoma tax.
The numbers
Picture an S corp with $200,000 of profit before the owner’s $80,000 salary. Qualified business income is profit after the owner’s salary: $200,000 − $80,000 = $120,000 (for simplicity, ignoring the employer’s share of payroll tax, which would lower it a little).
For illustration purposes. Tax law may change, which may change these calculations slightly.
| Owner’s taxable income | QBI deduction |
|---|---|
| Below the threshold (any business): 20% × $120,000 | $24,000 |
| Above the phase-in range, not a service business: lesser of 20% of QBI ($24,000) or 50% of W-2 wages ($40,000) | $24,000 |
| Above the phase-in range, a specified service business | $0 |
Below the threshold, a $24,000 deduction is worth about $5,280 in federal income tax at a 22% bracket ($24,000 × 22%). The deduction doesn’t carry over to the Oklahoma return, because Oklahoma starts from federal adjusted gross income and the QBI deduction comes after that line.
Inside the phase-in range, the deduction shrinks gradually rather than all at once. That is the range where planning moves the needle most.
The same salary that cuts payroll tax can cost QBI. A higher salary lowers QBI, but above the threshold it can raise the wage limit. The right salary balances payroll tax, the QBI deduction, and retirement contributions together.
Could this strategy work for your business?
In a free tax analysis, your tax strategist checks whether it fits and what it could save, using your real numbers.
How it works
- Figure qualified business income. Net profit from the business, after the owner’s salary in an S corp and after deductions like half of self-employment tax and retirement contributions for a sole proprietor.
- Take 20%. Below the threshold, the deduction is generally 20% of QBI, capped at 20% of taxable income (before the deduction, less capital gains).
- Apply the limits above the threshold. The deduction is limited to the greater of 50% of W-2 wages paid by the business, or 25% of wages plus 2.5% of the original cost of qualifying property. Service businesses lose the deduction as income rises through the phase-in range.
- Plan to stay under it. Pre-tax retirement contributions, timing of income and deductions, and the right salary can keep taxable income below the threshold or lower in the range.
Who it fits
- S corp, partnership and sole prop owners with profitable businesses.
- Service business owners near the threshold: doctors, dentists, attorneys, accountants, consultants, financial advisors.
- Owners with rental real estate that rises to the level of a trade or business.
When it’s limited or not available
- C corporations. The deduction is for pass-through income only.
- Wages you earn as an employee, including your S corp salary.
- Service business owners well above the phase-in range.
The rules
- Permanent. The July 2025 federal tax law made the deduction permanent; it had been set to expire after 2025.
- Wider phase-in. Starting in 2026, the phase-in range above the threshold is $75,000 for single filers and $150,000 for joint filers, so limits phase in more gradually. The threshold itself is adjusted for inflation each year.
- Minimum deduction. Starting in 2026, owners with at least $1,000 of QBI from businesses they materially participate in get a deduction of at least $400.
- Specified service businesses. Health, law, accounting, consulting, financial services, athletics, performing arts, and businesses whose main asset is the skill or reputation of the owners.
- Federal only. The deduction doesn’t reduce self-employment tax or Oklahoma income tax.
Risks to weigh
- Crossing the threshold by surprise. A strong December or a large capital gain can push you into the phase-in range.
- Salary changes. Moving an S corp salary for payroll tax reasons changes QBI too, in either direction.
- Other deductions shrink it. Bigger business deductions, like equipment expensing or the Oklahoma PTE tax, lower QBI and the deduction with it.
- Service business classification. Whether your business is a “specified service” business can be a judgment call.
How we handle it for clients
With a Cannon & Brown tax plan, we project your taxable income against the threshold during the year, model salary and retirement contributions together, and time income and deductions so you keep as much of the 20% deduction as the rules allow. Because our technology keeps your numbers current all year, we can test this strategy against your real numbers and adjust it as your business changes.
Illustrative example. The business owner and figures on this page are hypothetical, used to explain how the strategy works. They are not a client and not a promise of results. The example assumes $200,000 of S corp profit before an $80,000 salary, ignores the employer’s share of payroll tax, assumes no capital gains, and a 22% federal bracket for the below-threshold case. This page is educational and is not tax advice for your situation; tax rules and limits change.
Brooks leads Cannon & Brown Tax Advisors, a forward-thinking tax firm serving business owners in Oklahoma and beyond. He builds year-round tax strategies that help business owners keep more of what they earn and reach their goals. More about Brooks
Common questions about the QBI deduction
Can a C corporation take the QBI deduction?
No. The deduction is for pass-through income only, from S corps, partnerships, and sole proprietorships.
Does my S corp salary count as qualified business income?
No. Wages you earn as an employee, including your S corp salary, aren’t QBI. A higher salary lowers QBI, but above the threshold it can raise the wage limit, so salary needs modeling.
Does the QBI deduction lower my Oklahoma taxes?
No. Oklahoma starts from federal adjusted gross income, and the QBI deduction comes after that line, so it’s federal only.
Is the QBI deduction going away?
No. It had been set to expire after 2025, but the July 2025 federal tax law made it permanent.
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