Ask the Editor, November 14: 20% Qualified Business Income Deduction

Each week, in our Ask the Editor series, Joy Taylor, The Kiplinger Tax Letter Editor, answers questions on topics submitted by readers. This week, she’s looking at five questions on the 20% tax deduction for qualified business income or QBI. (Get a free issue of The Kiplinger Tax Letter or subscribe.)

1. Did the OBBB extend the QBI deduction?

Question: I know the qualified business income (QBI) deduction was going to expire at the end of 2025. Did the “One Big Beautiful Bill” (OBBB) extend this federal income tax break?

Joy Taylor: Yes. The OBBB not only extended this popular tax break that was otherwise set to expire after 2025 but also made it permanent. Self-employed individuals, independent contractors, gig workers who aren’t employees, farmers, some landlords and owners of pass-through entities, such as partnerships, LLCs and S corporations, claim the 20% QBI write-off on line 13 of their Form 1040 and attach IRS Form 8995 or 8995-A.

QBI is one’s allocable share of income less deductions from a business. The rules can get complicated, especially for individuals with 2025 incomes that exceed $394,600 for joint filers and $197,300 for other filers.

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This tax deduction was first enacted in the 2017 Tax Cuts and Jobs Act to provide some federal income tax parity between C corporations, which are taxed at a 21% rate, and pass-through entities, in which the individual owners pay income tax on earnings up to a 37% tax rate. Many congressional Republicans wanted to make the 20% QBI permanent, and they got their wish in the OBBB.

Note that making this tax break permanent cost the government lots of money. That’s because it is in the top 10 largest federal individual income tax expenditures, rounded up by the staff of the bipartisan congressional Joint Committee on Taxation.

2. Can freelancers claim the QBI deduction?

Question: I recently left my full-time job, and I am now an independent freelance consultant. Can I claim the 20% QBI deduction on my 2025 Form 1040?

Joy Taylor: Generally, yes. The QBI deduction applies not only to individual owners of pass-through entities, such as partnerships, S corporations and LLCs, but also to self-employed individuals who file Schedule C with their returns.

An important limitation applies to high earners in certain service fields. They include health, law, accounting, consulting, financial and brokerage services, performing arts, athletics, actuarial science, investing or trading in securities, or any business where the principal asset is the reputation or skill of its employees. If you are in one of the affected fields and your income for 2025 exceeds $394,600 for joint filers or $197,300 for single filers and head-of-household filers, the 20% deduction begins to phase out.

3. Do landlords qualify for the QBI write-off?

Question: I own rental property and generate a profit from the activity. Can I claim a 20% qualified business income deduction for my rental income that I report on Schedule E of my Form 1040?

Joy Taylor: It depends. Self-employed individuals and owners of LLCs, partnerships, S corporations and other pass-through entities can deduct 20% of their QBI, subject to limitations for individuals with incomes in 2025 of more than $394,600 for joint filers and $197,300 for single filers and head-of-household filers.

Rental income reported on Schedule E of the Form 1040 may be eligible for the deduction in certain cases. There are two ways to qualify for the 20% QBI write-off for rental income. The first is if the rental activity rises to the level of a trade or business. For this purpose, the IRS’s regulations refer to the standard under tax code Section 162, the statute that generally governs the deductibility of trade or business expenses.

There is no statutory or regulatory definition of a Section 162 trade or business. Instead, this is based on each taxpayer’s specific facts and circumstances. Some relevant factors are the type of property (commercial or residential), lease terms, extent of day-to-day involvement by the lessor or his or her agents, the significance and type of ancillary services provided under the lease, and the number of rentals.

A second way to qualify rental income as QBI is to meet an IRS safe harbor. At least 250 hours in a year must be devoted to the rental activity by the taxpayer, employees or independent contractors. Time spent on repairs, collecting rent, negotiating leases, tenant services, property management, advertising and supervising workers counts. Hours put in for driving to and from the property, arranging financing and constructing long-term capital improvements on the property aren’t included. If you own multiple properties, you can treat each property separately or aggregate similar rental activities into commercial or residential categories.

Taxpayers who use the safe harbor must meet strict recordkeeping requirements and attach an annual statement to their tax returns. Contemporaneous records must detail hours, dates and descriptions of the services and who performed them. If the services are done by contractors or employees, the taxpayer must keep logs of the work done by them, as well as proof of payment.

Note that the safe harbor doesn’t apply to rental income from property leased under a triple net lease or if the owner’s personal use of residential property exceeds the greater of 14 days or 10% of the days rented.

Treating rental income as QBI doesn’t change how you report that income on your Form 1040. Rental estate rental income is usually reported on Schedule E of the 1040. Also, the rental income generally isn’t subject to self-employment tax.

4. Do REIT investors get the 20% QBI write-off?

Question: I am thinking of buying shares in a real estate investment trust (REIT). My financial advisor told me that REIT investors qualify for the 20% QBI deduction. Is this true?

Joy Taylor: Yes. The 20% QBI deduction also applies to holders of publicly traded partnership units and REIT shares. Individuals can deduct 20% of qualified REIT dividends, which are distributions not taxed under the favorable rules for capital gains and dividends, and 20% of their share of a PTP’s QBI.

5. How do LLC members know the amount of the entity’s QBI?

Question: I own membership interests in a multi-member LLC. How do I know if the LLC has QBI, and if it does, my allocable share of the LLC’s QBI?

Joy Taylor: The Schedule K-1 that you receive from the LLC will include your allocable share of the LLC’s QBI, if any, in the “Other Information Box” of the K-1 under a special code. Similar information will be shown on Schedule K-1s given to S corporation shareholders and to partners in partnerships.

About Ask the Editor, Tax Edition

Subscribers of The Kiplinger Tax Letter, The Kiplinger Letter and The Kiplinger Retirement Report can ask Joy questions about tax topics. You'll find full details of how to submit questions in each publication. Subscribe to The Kiplinger Tax Letter, The Kiplinger Letter or The Kiplinger Retirement Report.

We have already received many questions from readers on topics related to tax changes in the One Big Beautiful Bill and more. We will continue to answer these in future Ask the Editor round-ups. So keep those questions coming!

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