By: Nora Halstead

Why the QBI Deduction Matters

The Qualified Business Income deduction remains one of the most powerful tax benefits available to business owners. For many small businesses, it allows up to 20 percent of qualified income to be deducted, lowering total taxable income. Yet many taxpayers misunderstand how it works, wrongly assume they qualify, or structure their business in a way that prevents them from claiming it. Understanding the QBI deduction in 2025 ensures you maximize savings while staying compliant with IRS requirements.

Who Qualifies for the QBI Deduction

The QBI deduction applies to pass-through business owners, including:

• S corporations
• Partnerships
• LLCs are taxed as partnerships
• Sole proprietorships
• Some rental property owners
• Certain independent contractors

To qualify, the business must generate qualified business income, which generally includes profit from business activity but excludes items such as:

• W2 wages
• Guaranteed payments
• Capital gains
• Interest income not tied to the business

Your advisor helps determine which income streams count toward QBI.

Understanding Specified Service Trades or Businesses (SSTBs)

Some industries face limitations based on income. These include:

• Health fields
• Law
• Consulting
• Financial services
• Athletics
• Brokerage services
• Any business relying on the reputation or skill of the owner

When taxable income exceeds certain thresholds, the QBI deduction begins to phase out for SSTBs. Proper planning is required to avoid losing the deduction.

Income Thresholds in 2025

The IRS adjusts the QBI income limits annually. When your income exceeds these limits, the deduction may be reduced or eliminated, depending on:

• Business type
• Amount of W2 wages paid
• Qualified property held

Understanding where you fall within the thresholds helps determine how much of the deduction you can legally claim.

W2 Wages and the QBI Calculation

For businesses above the income threshold, the QBI deduction relies on W-2 wages. This is why payroll planning is essential for S corporations. The QBI deduction can be limited to:

• 50 percent of W2 wages or 25 percent of W2 wages plus 2.5 percent of the unadjusted basis of qualified property

This formula determines how much of the deduction you qualify for at higher income levels.

Why Payroll Strategy Matters

For S corporations, the choice of reasonable compensation directly affects:

• Self-employment tax
• QBI eligibility
• Total taxable income

Setting payroll too high reduces profitability and reduces QBI. Setting payroll too low triggers IRS scrutiny. Your advisor must carefully calculate the ideal wage structure.

Rental Properties and QBI

Rental income can qualify for QBI if the rental rises to the level of a trade or business. This usually requires:

• Regular activity
• Record-keeping
• Advertising or management
• Consistent leasing

Some rental properties qualify while others do not. Proper documentation is crucial.

Short Term Rentals and QBI

Short-term rentals often meet the trade-or-business requirement because the activities resemble hotel operations. However, classification depends on:

• Average stay length
• Services provided
• Level of involvement
• Platform activity
• Profit intent

Each property must be reviewed individually.

How to Maximize the QBI Deduction Legally

There are several strategies business owners can use:

• Optimize payroll for S corporations
• Avoid exceeding income phaseout limits
• Consider filing jointly if beneficial
• Restructure business entities
• Track depreciation and property basis
• Group businesses when appropriate
• Avoid mixing passive and active income without proper analysis
• Time income and deductions strategically

Your advisor may recommend shifting income, adding payroll, or adjusting entity structure to support QBI.

Common Mistakes That Reduce or Eliminate QBI

• Incorrect payroll
• Misclassifying rentals
• Failing to keep proper records
• Taking too many guaranteed payments in partnerships
• Overpaying owners unnecessarily
• Mixing business and personal expenses
• Not planning before year-end

These mistakes can drastically reduce tax savings.

How QBI Applies When You Own Multiple Businesses

If you own multiple pass-through entities, QBI must be calculated separately for each business unless grouping is allowed. Grouping may simplify calculations and support eligibility,y but must be done intentionally and correctly. Your advisor handles grouping decisions to avoid errors.

Why QBI Requires Year-Round Planning

The QBI deduction cannot be maximized during tax season alone. It requires:

• Ongoing payroll analysis
• Quarterly income reviews
• Entity evaluations
• Strategic capital investments
• Documentation ofthe  property basis

Business owners who plan throughout the year consistently see better outcomes.

How AE Tax Advisors Helps Clients Maximize QBI

AE Tax Advisors assists clients by:

• Evaluating whether the business qualifies
• Reviewing income thresholds
• Optimizing payroll
• Analyzing W2 wage requirements
• Classifying rental and short-term rental activity
• Documenting the property basis
• Structuring entities correctly

Clients receive a clear plan that reduces taxes while fully complying with IRS regulations.

Final Thoughts

The QBI deduction is one of the most valuable tax benefits available to business owners, but it requires accurate structuring and year-round planning. Understanding how the rules apply to your business helps you maximize the deduction and avoid costly mistakes. With the right guidance, you can legally reduce taxable income and keep more of your hard-earned profit.

For high-income individuals who want a strategic partner steering their tax planning, more information is available at AETaxAdvisors.com.

 

Disclaimer: The information provided in this article is for general informational purposes only and should not be construed as financial, tax, or legal advice. While the article aims to highlight common strategies and trends, it does not consider individual circumstances. Readers are encouraged to consult with a qualified professional for advice tailored to their specific situation.