Practical Strategies to Maximize the Qualified Business Income Deduction
The Qualified Business Income Deduction (QBID), introduced in 2017, became permanent in 2025. This article analyzes its calculation logic and, in response to limitations such as insufficient W-2 wages, proposes practical strategies for S corporations and partnerships to help taxpayers fully enjoy the deduction of up to 20%.
This article is a guest post by Michael Geller, CPA and tax partner at Gursey Schneider. The views expressed are solely those of the author.
In 2025, the One Big Beautiful Bill Act made the Qualified Business Income Deduction (QBID) permanent, solidifying this significant tax-saving opportunity. Originally introduced in 2017 as part of the Tax Cuts and Jobs Act, the QBID allows taxpayers other than corporations to deduct an additional 20% of their qualified business income. For example, a taxpayer with $1 million in qualified business income could reduce their taxable income by up to $200,000.
Sole proprietors, partners in partnerships, and S corporation shareholders are the taxpayer groups most likely to benefit from the QBID. For deduction purposes, businesses are divided into two categories: Specified Service Trades or Businesses (SSTBs) and qualified trades or businesses. SSTBs typically include professional service industries such as law firms, accounting firms, and dental practices. Any business that is not an SSTB is considered a qualified trade or business.
Income generated from qualified trades or businesses tends to be higher, which can easily trigger QBID limitations, posing an obstacle to maximizing the deduction's benefits. One such limitation is insufficient W-2 wages, but there are methods to overcome this issue. Although the QBID has many nuances, a thorough understanding of the deduction mechanism and the use of practical strategies can help ensure the deduction is claimed correctly and fully, resulting in significant tax savings.
Understanding QBID Limitations
As an overview of the QBID, let's first focus on the basic calculation. The QBID is the lesser of the following two amounts:
- 20% of the taxpayer's qualified business income (QBI) from qualified trades or businesses, plus 20% of qualified REIT dividends and qualified PTP income;
- 20% of taxable income before the QBID, minus net capital gains.
Regarding the W-2 wage and tax basis limitations, the QBID cannot exceed the greater of the following two amounts:
- 50% of the W-2 wages paid by the qualified trade or business;
- 25% of W-2 wages plus 2.5% of the unadjusted basis of certain tangible property.
When performing the basic calculation, taxpayers may be pleased to anticipate deducting 20% of their qualified business income. However, many then discover that their business does not have sufficient wage expenses to unlock the full benefit, catching them off guard.
For example, a taxpayer with $1 million in qualified business income might expect a $200,000 QBID deduction. However, if that qualified business only has $100,000 in W-2 wages, the QBID would be limited to $50,000 ($100,000 × 50%). This means a $150,000 deduction would be lost.
Practical Solutions to Address QBID Limitations
For S corporations, one solution is to verify whether the owner/shareholder's salary has been updated in a timely manner. S corporation owners are already required to receive reasonable compensation, so this is a win-win: it satisfies IRS requirements while also increasing the QBID amount.
For partnerships, partners cannot receive W-2 wages. Such payments are typically characterized as guaranteed payments and do not count toward the QBID limit. A solution is to insert another holding company, treated as a taxable entity, between the partner and the operating partnership. This allows the partner to receive a W-2 from the lower-tier operating partnership. If this strategy is used, it is crucial to pay compensation at an arm's length or market rate.
These strategies do not change the total income the individual will receive. The taxpayer's income is recharacterized (from K-1 income to W-2 wages), thereby enabling them to enjoy a larger deduction. This is an efficient way to reduce overall tax liability.
For taxpayers with income above the threshold, the QBID is a powerful tool for reducing tax liability. Making the deduction permanent creates planning opportunities that should not be overlooked. By implementing the right strategies, taxpayers can maximize the deduction and lock in significant, ongoing tax savings.