What Is the QBI Deduction, and Why Do Most Solo Business Owners Miss It?

There is a deduction that lets self-employed business owners take 20 percent of their net business income off their taxable income. Off the top. Before anyone figures what they owe.

It is called the Qualified Business Income deduction. QBI for short. Most solo business owners have never heard of it. Not because it is hard. Because nobody told them.

How it works

Say you are a barber, a stylist, a freelance designer, or any other solo service business. You made 70,000 dollars in net business income this year. The QBI deduction lets you take 20 percent of that, or 14,000 dollars, right off your taxable income.

So you only pay tax on 56,000 dollars. At a typical tax rate, that keeps over 3,000 dollars in your pocket, from one deduction.

Who qualifies

Most solo service business owners qualify for QBI. If you file a Schedule C as a sole proprietor or have a single-member LLC, you likely qualify. The full 20 percent deduction is open to most self-employed people whose taxable income is under certain limits. Most solo owners are well under them.

There are some exceptions for what the IRS calls specified service trades and businesses. These include health, law, accounting, and consulting. Those jobs face extra limits at higher incomes. But for most beauty professionals, trades, freelancers, and small service businesses, QBI is available in full.

How to actually claim it

You claim the deduction on your tax return. Most tax software will figure it for you if you fill out your Schedule C right. People miss it because they file on their own and don’t know to look. Or they hand their taxes to someone who assumes they already know.