Michael Geller, CPA
Tax Partner, Gursey Schneider
In 2025, the One Big Beautiful Bill Act made the qualified business income deduction permanent, solidifying a significant tax savings opportunity. First introduced in 2017 as part of the Tax Cuts and Jobs Act, QBID allows taxpayers, other than corporations, an opportunity to take an additional deduction equal to 20% of qualified business income. A taxpayer with $1 million in qualified business income could thereby reduce their taxable income by as much as $200,000.
Sole proprietorships, partners and S corporation shareholders are the taxpayers who may benefit the most from QBID. For deduction purposes, businesses are put in one of two classifications: specified service trades or businesses and qualified trades/businesses. SSTBs generally include professional service businesses such as law firms, accounting firms, dentistry, etc. Any business that is not considered an SSTB is considered a qualified trade or business.
It is common for qualified trades or businesses to generate income high enough to trigger QBID limits, which can become a roadblock to maximizing the benefits of the deduction. One such limitation can be insufficient W-2 wages, though there are ways to overcome this issue. While there are many nuances to QBID, a solid understanding of the mechanics of the deduction and practical strategies to overcome challenges can help ensure it is utilized correctly and to its full potential, significant tax savings.
Understanding QBID Limits
As an overview of QBID, we’ll look first at the basic calculation. QBID is the lesser of:
1. 20% of the taxpayer’s QBI from a qualified trade/business plus 20% of qualified REIT dividends and qualified PTP income
2. 20% of taxable income before QBID less net capital gain
With regard to W-2 wage and basis limitations, QBID is limited to the greater of:
1. 50% of W-2 wages paid with respect to the qualified trade or business
2. 25% of the W-2 wages plus 2.5% of the cost basis of certain fixed assets
When performing the basic calculation, taxpayers may feel elated at the prospect of deducting 20% of their qualified business income. Many are then caught off guard when they learn their business doesn’t have enough payroll expenses to unlock the full benefit.
For instance, with $1 million in qualified business income, a taxpayer may expect to receive a $200,000 QBID deduction. However, if the qualified business had only $100,000 of W-2 wages, this would unfortunately limit QBID to $50,000 ($100,000 x 50%). This would leave $150,000 of deductions on the table.
Practical Solutions to QBID Limits
For S Corporations, one solution is to double-check if owner/shareholder wages are up to date. S corporation owners are required to take a fair wage anyway, so this can be a win-win: You meet IRS requirements and boost your QBID allowance at the same time.
When dealing with a partnership, owners cannot receive W-2 wages. These payments are typically characterized as guaranteed payments, which do not count towards the QBID allowance. A solution here would be to insert another regarded partnership (holding company) between the partners and the operating partnership. This allows the partners to receive W-2s from the underlying operating partnership. If this strategy is pursued, paying an arm’s length or market salary is important.
These strategies do not involve changing the total income one will receive. A taxpayer’s income is recharacterized (K-1 income to W-2 wages) and enables the taxpayer to enjoy a larger deduction. This is an efficient process to reduce overall taxes.
For taxpayers above the income thresholds, QBID can be a powerful tool to cut down on taxes. Making the deduction permanent creates a planning opportunity that should not be ignored. With the right strategies in place, it is possible to maximize the deduction and lock in significant, recurring savings.