Karla Dennis, EA, MST, is CFO/CEO of the award-winning tax accounting firm KDA Inc.—specializing in tax planning.
Business owners, it’s time to talk about one of the most powerful deductions still on the books: the qualified business income deduction, also known as QBI. Below are four ways to lock in QBI tax savings this year, plus the common mistakes I’ve seen that can wipe them out.
QBI: What It Is And Why It Matters
QBI allows eligible businesses to deduct up to 20% of their qualified business income. That’s not a credit—it’s a direct deduction of taxable income. It’s available for LLCs, S corporations, partnerships and sole proprietorships, but it is not available for C corporations. For example, a solo marketing consultant earning $120,000 can use the QBI deduction to deduct $24,000, reducing taxable income to $96,000.
The U.S. Treasury Department estimated in 2019 that QBI deductions reduced taxes for pass-through business owners by roughly $34.5 billion.
Business owners should verify their entity type and confirm whether their structure allows QBI. The income thresholds in 2025 phase out around $197,300 for single filers and $394,600 for joint filers.
If income exceeds those limits, the deduction begins to shrink, especially for service-based businesses. Certain industries, such as law, consulting and accounting, lose QBI eligibility faster than others. For instance, a marketing consultant making $200,000 might only get a partial deduction unless expenses are structured strategically. A retailer operating a boutique shop making $400,000 and filing jointly can still access QBI, but only if they stay under the phase-out threshold with smart expense planning.
Forecasting income early is critical. If your income is likely to reach the phase-out range, proactive planning can help maintain eligibility, and one of the most effective strategies is contributing to retirement plans.
Retirement Contributions And QBI
Retirement contributions such as SEP IRAs, Solo 401(k)s or SIMPLE IRAs directly lower taxable income. This approach not only helps build long-term wealth but can also bring income below the QBI threshold to preserve the deduction—a double benefit of tax deferral and QBI access.
For example, a business owner who maximizes retirement contributions can reduce taxable income by $22,500 to as much as $66,000, depending on the plan type. A consultant projected to make $400,000 in 2025—just over the joint filer phase-out—could fund a Solo 401(k) that brings income below the limit, preserving the full QBI deduction and saving tens of thousands of dollars.
Keep in mind that opening and funding a retirement account before year-end is essential if you want to take advantage of this strategy.
Wages, Assets And QBI Optimization
If your income remains above the limits even after retirement contributions, wages and assets become key factors. QBI eligibility for higher-income businesses is tied to W-2 wages and qualifying assets. Paying a reasonable wage through payroll can increase the allowable QBI deduction, and assets such as real estate, equipment or technology used in your business may also help qualify under QBI rules.
For example, a real estate investor holding $2 million in rental properties inside an LLC may use depreciation as part of the QBI formula. Even though rental income is passive, the right structure can allow QBI savings. Similarly, a store owner paying staff $150,000 in W-2 wages and holding $200,000 in fixtures and equipment may preserve QBI eligibility even with higher income.
Strategically managing payroll and distributions can have a big impact on your QBI deduction. You can approach this by working with a tax strategist, using trusted tax software or modeling scenarios to see what combination works best for your situation.
Common Mistakes That Eliminate QBI
Even when eligible, it’s easy to lose QBI benefits due to common errors. Mixing personal and business expenses can disqualify deductions. Misclassifying contract payments or wages raises red flags. The biggest mistake I’ve seen is ignoring the phase-out until it’s too late.
For example, a business owner who realizes in December that they are $5,000 over the QBI limit has limited options to adjust income timing or increase contributions. They risk losing thousands in deductions. Another example: A financial coach who waited until tax season discovered they had disqualified themselves from QBI by failing to track income midyear. Quarterly planning could have preserved the deduction.
Scheduling quarterly check-ins to review payroll, distributions and overall income can help monitor QBI eligibility throughout the year. This can be done with a tax strategist, through self-assessment using reliable tools or with software that tracks income and deductions in real time.
The Takeaway For 2025
The QBI deduction remains available in 2025, but proactive planning is essential. Keeping income within thresholds, optimizing retirement contributions, balancing wages and distributions and avoiding last-minute scrambling are key to maximizing savings under this powerful tax provision.
The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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