Freelancers & Business Owners! The 'QBI Deduction' Cuts Your Taxable Income by 20%
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| Freelancers & Business Owners! |
If you own a small business, you are used to deducting expenses. You deduct your internet bill, your office rent, and your software subscriptions to lower your taxable profit.
But what if the IRS told you: "Hey, you can just take 20% of your profit and pretend it doesn't exist. You don't have to spend any money to get this deduction."
This is not a fantasy. It is called the Qualified Business Income (QBI) Deduction, also known as Section 199A. Introduced by the Tax Cuts and Jobs Act (TCJA), it is arguably the single biggest tax break for entrepreneurs in decades.
However, time is running out. As you file your 2025 taxes in early 2026, this might be your last chance to claim it before it sunsets. Here is how to navigate the maze and claim your 20% discount.
What is the QBI Deduction?
The QBI deduction allows owners of "pass-through" entities to deduct up to 20% of their Qualified Business Income from their taxes.
- Who qualifies? Sole Proprietorships (Schedule C), Partnerships, LLCs, and S-Corporations.
- Who does NOT qualify? C-Corporations (they pay a flat 21% rate) and employees (W-2 workers).
💰 The Math: The Power of 20%
Let's say you are a freelance graphic designer (Sole Proprietor).
- Net Profit: $100,000
- Standard Tax Rules: You would normally pay income tax on the full $100,000.
- With QBI Deduction: You deduct 20% ($20,000).
- Taxable Income: You only pay tax on $80,000.
If you are in the 24% tax bracket, you just saved $4,800 in taxes without spending a dime.
The Catch: Are You an "SSTB"?
The IRS loves to complicate things. They created a special category called Specified Service Trade or Business (SSTB).
If your business relies on the "reputation or skill" of its employees, you are likely an SSTB. This includes:
- Doctors, Nurses, Pharmacists
- Lawyers & Accountants
- Consultants
- Athletes & Performing Artists
🌟 Good News for Engineers & Architects: You were specifically EXEMPTED from this list. Even if you are high-income, you get the full deduction!
The Income Limits (2025 Tax Year Numbers)
As you file your 2025 return now (in 2026), these are the inflation-adjusted thresholds you need to watch:
1. Below the Threshold (Safe Zone)
If your 2025 taxable income is below roughly $197,300 (Single) or $394,600 (Married Filing Jointly):
- Everyone wins! It doesn't matter if you are a doctor (SSTB) or a plumber. You get the full 20% deduction.
2. Above the Threshold (Danger Zone)
If your income exceeds these limits:
- Non-SSTBs (e.g., Architects, Retailers): You can still get the deduction, but it is limited by W-2 wages paid to employees or the value of your business property.
- SSTBs (e.g., Doctors, Lawyers): Your deduction begins to phase out. Once you hit the upper limit (approx. $247,300 Single / $494,600 Married), you get $0 deduction.
Strategy: How to Save the Deduction (Before April 15)
If you are a high-earning doctor making $410,000 (Married), you are in the "Phase-Out" zone where you lose money.
The Goal: Lower your "Taxable Income" to get back under the $394,600 threshold.
How to Lower 2025 Income NOW (in 2026):
- Retroactive Retirement Contributions: You can contribute to a SEP-IRA or HSA for the 2025 tax year up until the filing deadline (April 15, 2026). A $20,000 contribution could drop your income enough to restore your full QBI deduction.
- Itemized Deductions: If you haven't filed yet, check if maximizing itemized deductions helps lower your taxable income.
The "Sunset" Warning (Dec 31, 2025)
Here is the scary part. The QBI Deduction was scheduled to sunset (expire) on December 31, 2025.
Unless Congress passes a new extension law immediately, this 2025 tax return might be the last time you can claim this 20% bonus. For the 2026 tax year (filed in 2027), this deduction may be gone entirely, effectively raising your taxes.
Don't File Blindly
The QBI deduction is complex, but it is incredibly lucrative. It effectively turns a 37% tax bracket into a 29.6% bracket.
If you are a high earner, do not just file your taxes blindly. Ask your CPA: "Can a SEP-IRA contribution bring my income down enough to unlock the full QBI deduction?" The answer could save you thousands.
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