QBI deduction (section 199A) for tax preparers

“Individual taxpayers and some trusts and estates may be entitled to a deduction of up to 20% of their net QBI from a trade or business, including income from a pass-through entity, but not from a C corporation, plus 20% of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income.” IRS, Instructions for Form 8995 (2025)

What is the QBI deduction and who can claim it?

The QBI deduction is the deduction under IRC section 199A for up to 20% of qualified business income from a sole proprietorship, partnership or S corporation, plus 20% of qualified REIT dividends and qualified PTP income. Individuals and eligible estates and trusts claim it. Partnerships and S corporations don't claim it themselves; they pass the information to owners on an attachment to Schedule K-1, according to the Instructions for Form 8995 (2025).

QBI is the net of qualified income, gain, deduction and loss from a U.S. trade or business that is allowed in computing taxable income for the year. The total deduction can't exceed 20% of taxable income before the QBI deduction, minus net capital gain increased by qualified dividends. The result goes on Form 1040 line 13a from Form 8995 line 15 or Form 8995-A line 39. The 2025 instructions list several items that are never QBI:

• Wages, except statutory employee income (Form W-2, box 13 checked)
• Reasonable compensation from an S corporation and guaranteed payments from a partnership
• Capital gains and losses, dividends, and interest not allocable to the business
• Qualified REIT dividends and qualified PTP income, which have their own 20% component
• Tip income excluded under section 224

Material participation isn't required. The trade or business test is applied at the entity level for pass-through interests.

Which K-1 boxes feed the QBI deduction?

Schedule K-1 (Form 1065) box 20 code Z and Schedule K-1 (Form 1120-S) box 17 code V carry the section 199A information an owner needs: QBI items, W-2 wages, UBIA of qualified property and section 199A dividends for each trade, business or aggregation, usually on an attached statement. The 2025 K-1 instructions describe these as items subject to owner-specific determinations, so they aren't automatically QBI. Only items actually allowed in computing taxable income count. A loss suspended under the basis, at-risk or passive rules (sections 704(d), 1366(d), 465 and 469) stays out of QBI until it is allowed, and keeps its qualified status while it waits.

Code-by-code detail is on the K-1 box 20 code Z and K-1 (1120-S) box 17 code V pages.

How do the QBI thresholds, SSTB rules and W-2 wage limit work?

The QBI deduction thresholds for 2025 are $197,300 of taxable income before the deduction, or $394,600 for married filing jointly, per the Instructions for Forms 8995 and 8995-A (2025). At or below the threshold the deduction is a flat 20% of QBI on Form 8995, with no W-2 wage or UBIA limit, and a specified service trade or business (SSTB) counts as a qualified business.

Above the threshold, Form 8995-A limits each business to the greater of 50% of its W-2 wages or 25% of W-2 wages plus 2.5% of UBIA, as IRC section 199A(b)(2) provides. That limit phases in over the next $50,000 ($100,000 joint). SSTBs in the phase-in range keep only an applicable percentage of their QBI, wages and UBIA through Schedule A, and above the range they get nothing. SSTB fields include health, law, accounting, consulting, financial services, investing and businesses built on an owner's reputation or skill. De minimis gross receipts rules can take a business out of SSTB status.

What does a QBI deduction calculation look like?

For example, Dana and Chris file jointly with 2025 taxable income of $240,000 before the QBI deduction, so they use Form 8995. Dana is a general partner whose K-1 (1065) box 20 code Z statement shows $90,000 of QBI from box 1. QBI from the partnership is reduced by the deductible part of her self-employment tax on that income, $6,358. Chris owns an S corporation whose K-1 (1120-S) box 17 code V statement shows $60,000 of QBI (his W-2 wages from the company aren't QBI). Their Form 1099-DIV shows $2,000 in box 5, and net capital gain plus qualified dividends is $15,000.

If their income were above $394,600, the same K-1 statements would go on Form 8995-A and the W-2 wages and UBIA reported with code Z and code V would start to matter.

What do reviewers check on the QBI deduction?

A reviewer checking the QBI deduction confirms six items, each tied to the 2025 Instructions for Form 8995 or 8995-A. Start with the K-1 statements and the prior-year Form 8995 or Schedule C (Form 8995-A), because carryforward losses and suspended losses from earlier years change this year's QBI even when the business that produced them no longer exists. Then confirm the taxable income figure, since it decides which form applies and whether the wage limit and SSTB rules come into play.

Section 199A dividends need their own look. The instructions treat a REIT dividend as qualified only if the shares were held for more than 45 days and the dividend isn't a capital gain dividend or qualified dividend, so a Form 1099-DIV box 5 amount from a position bought and sold within weeks may not belong on line 6.