Definition
A federal deduction that lets many owners of sole proprietorships and pass-through businesses deduct up to 20% of their qualified business income.
What it means
The qualified business income deduction, also called the section 199A deduction, allows eligible owners of sole proprietorships, partnerships, S corporations and some trusts and estates to deduct up to 20% of their qualified business income, plus 20% of qualified REIT dividends and publicly traded partnership income. Income earned as an employee or through a C corporation does not qualify. It is taken on Form 1040 after adjusted gross income, whether you itemize or not, so it lowers income tax but not self-employment tax. At higher incomes, limits apply based on the type of business, W-2 wages paid and property held. For tax years beginning after 2025, the law adds a minimum deduction for active qualified business income.
Example
A freelancer with $40,000 of qualified business income and enough taxable income may deduct $8,000 (20%) before figuring income tax.
Illustrative numbers only. Your situation will differ.