Self-employed individuals and small business owners now have permanent access to a key tax deduction following recent legislative action. The qualified business income deduction, part of the 2017 Tax Cuts and Jobs Act, was made permanent by President Trump's 2025 tax bill.
The deduction allows eligible taxpayers to deduct up to 20% of their qualified business income on federal income taxes. Known as the Section 199A deduction, it reduces taxable business income and can lower tax burdens or increase refunds. The deduction applies whether taxpayers itemize deductions or take the standard deduction.
Qualified business income includes net profits from business operations, with specific exclusions. The IRS excludes capital gains, interest income, foreign business income, wage income, certain dividends, income from publicly traded partnerships, annuities, and reasonable S corporation salary payments.
Eligibility extends to owners of passthrough businesses including sole proprietorships, limited liability companies, S corporations, partnerships, and certain trusts. Income limits apply, with thresholds of $394,600 for married joint filers and $197,300 for single filers for the 2025 tax year.
Special considerations exist for specified service trades or businesses. These include health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, investing, and securities trading businesses. Certain rental real estate businesses meeting IRS standards may also qualify.
Calculation involves multiplying qualified business income by 20% for those below income thresholds. For example, $50,000 in qualified business income yields a $10,000 deduction. More complex calculations apply to higher-income specified service businesses, potentially involving W-2 wages and qualified property values.
The IRS recommends consulting tax professionals or using tax software for accurate calculations. The deduction does not reduce the 15.3% self-employment tax covering Social Security and Medicare contributions.
Originally enacted for 2018 through 2025 tax years, the deduction became permanent with the July 4, 2025 passage of the One Big Beautiful Bill Act.