The Qualified Business Income (QBI) deduction — formally Section 199A of the Internal Revenue Code — was created by the Tax Cuts and Jobs Act of 2017 and allows eligible taxpayers to deduct up to 20% of their qualified business income from self-employment, sole proprietorships, S-Corps, partnerships, and qualifying rental real estate. It reduces taxable income, not AGI — meaning it applies after the standard or itemized deduction.
The QBI deduction is scheduled to expire after 2025 under current law. Verify its status for your tax year before filing. Tax legislation frequently extends provisions like this — but confirmation requires checking the current tax code.
Who qualifies for QBI
You may be eligible for the QBI deduction if you have:
- Schedule C income from freelancing, consulting, or sole proprietorship
- Schedule E income from rental real estate (with conditions — see safe harbor below)
- K-1 income from a partnership or S-Corporation
- S-Corp shareholder income (the W-2 you receive from your own S-Corp is NOT QBI — only distributions and certain other items qualify)
Income limits apply. For 2025 returns, the full deduction applies up to $197,300 (single) / $394,600 (MFJ). Above these thresholds, the deduction phases out or is limited for Specified Service Trades or Businesses (SSTBs — which include health, law, accounting, consulting, financial services, and performing arts).
What is NOT qualified business income
- W-2 wages from an employer (even your own S-Corp’s payroll to yourself)
- Capital gains and losses (Schedule D)
- Dividends and interest income
- Commodities income
- Foreign currency gains
Rental real estate and the QBI safe harbor
Rental income typically qualifies for QBI only if it rises to the level of a “trade or business.” The IRS created a safe harbor in Revenue Procedure 2019-38: if you spend 250 or more hours per year on rental activities (maintenance, management, rent collection, lease negotiations), you may elect the safe harbor and treat the rental as a qualified trade or business for QBI purposes. This requires keeping contemporaneous records. Software handles the election once you input the hours.
How software handles the QBI deduction
All major consumer software calculates QBI automatically. The key inputs are:
- Net profit from Schedule C or K-1
- Your total taxable income (to determine if income limits apply)
- Rental activity hours (for the safe harbor election)
- Whether your business is an SSTB (service business subject to the phase-out)
FreeTaxUSA handles QBI for Schedule C freelancers at the free federal tier. TurboTax Premier handles both Schedule C and rental real estate QBI. H&R Block Premium handles the rental safe harbor.