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What Is the QBI Deduction? A Plain-English Guide for Business Owners

If you’re a business owner, you’ve probably heard the phrase “QBI deduction” at some point—often said quickly, vaguely, and followed by advice to “talk to your accountant.” That’s unfortunate, because the core idea behind the QBI deduction is actually straightforward. And once you understand it, you’ll start to see why some business owners pay far less tax than others—even when they earn the same amount of money. This guide is written for people who know nothing about QBI. No tax background required. By the end, you should be able to explain the basics of the QBI deduction to a stranger without using jargon.

The Big Idea Behind the QBI Deduction

The Qualified Business Income (QBI) deduction is a tax rule that allows certain business owners to reduce how much of their income is subject to federal income tax. In simple terms, if you earn money from a business you own, the tax code may let you ignore—meaning deduct—up to 20% of that income before calculating your taxes. You don’t earn less money. You don’t change your business. You just pay tax on a smaller portion of what you earned. That’s the entire concept.

Why the QBI Deduction Exists

To understand QBI, it helps to look at what changed in the tax code a few years ago. In 2017, Congress passed a major tax reform that significantly lowered corporate tax rates for large corporations. That was great news for companies like Apple and Amazon—but it didn’t directly help most small business owners. Why? Because most small businesses aren’t corporations. Instead, they operate as:
    • sole proprietorships
    • LLCs
    • partnerships
    • S-corporations
These are known as pass-through businesses because the business itself doesn’t pay income tax. Instead, the profit “passes through” to the owner’s personal tax return. Without QBI, small business owners would have missed out on much of that tax reform. The QBI deduction was created to balance that gap and reward people who take on the risk of owning a business. (For those who want the official source, the IRS outlines QBI under Section 199A here)

A Simple Story That Makes QBI Click

Imagine two people who each earn $100,000 in a year. The first person is an employee. They work for a company and receive a $100,000 salary reported on a W-2. The second person owns a small business. After expenses, their business also earns $100,000 in profit. Before QBI, these two people were often taxed similarly. With QBI, the business owner may be able to deduct up to $20,000 of that income. That means they are taxed as if they earned $80,000 instead of $100,000. The employee does not get that option. That difference exists for one reason: Congress wanted to encourage business ownership and risk-taking.

Who the QBI Deduction Is For

QBI generally applies to people who earn income from businesses they own, including:
    • sole proprietors
    • partners in partnerships
    • LLC owners
    • S-corporation owners
If your income comes from a traditional paycheck, QBI does not apply to that income. This distinction matters more than most people realize, and it explains why two people with the same income can end up with very different tax outcomes.

What QBI Is — and What It Is Not

One reason QBI feels confusing is because people assume it works like other tax breaks. It doesn’t. The QBI deduction is:
    • a deduction, not a credit
    • based on business profit, not revenue
    • claimed on your personal tax return
It is not:
    • a refund
    • automatic
    • guaranteed every year
If you don’t meet the rules, the deduction simply doesn’t apply.

A Practical Example (No Tax Math Required)

Let’s say your business brings in $120,000 of revenue during the year. After paying expenses, your profit is $90,000. If you qualify for the QBI deduction, you may be able to deduct up to $18,000 (20% of $90,000). That means you pay tax on $72,000 instead of $90,000. Nothing about your business changed. Only the amount of income the IRS taxes.

Why People Get Confused About QBI

Most confusion around QBI comes from three incorrect assumptions. First, people assume all business income qualifies. It doesn’t. Second, people assume wages count as QBI. They don’t. Third, people assume everyone gets the full 20% deduction. That’s rarely true. The QBI rules include income limits and business-type limitations that intentionally restrict who qualifies and when. Those limits are not loopholes or mistakes. They are part of the design.

Why This Matters Even If You Never Qualify

Even if you never qualify for the QBI deduction, understanding it is still valuable. QBI explains why:
    • entity choice matters
    • income timing can change tax outcomes
    • strategies that work for one business fail for another
It’s not just a deduction. It’s a window into how the tax code views business income.

The Bottom Line

The QBI deduction exists to reward business ownership, risk, and profit. At its most basic level:
    • it allows certain business owners to deduct up to 20% of their business income
    • it applies to profit, not wages
    • it depends on income level and business type
If you can explain that much to someone else, you understand the foundation. Everything else—thresholds, phaseouts, and planning strategies—builds from here.

Where This Guide Fits — And What’s Next

If you’ve made it this far, you now understand what the QBI deduction is and why it exists.

That’s the foundation — but it’s only the beginning.

In the next few guides, we’ll build on this starting point and answer the questions business owners usually ask next, including:

Each article builds on the last. No jargon. No formulas. Just clarity.

Taken together, these explain how the same deduction produces very different tax outcomes for business owners who appear similar on the surface.

Optional external references: