The Qualified Business Income deduction, often called the QBI deduction or Section 199A deduction, is a federal income tax deduction available to many owners of pass-through businesses. It can reduce taxable income for taxpayers with eligible business income from sole proprietorships, partnerships, S corporations, and certain rental real estate activities.

In Income Lab, QBI is modeled through the Tax Treatment selected for an Other Income item and, when applicable, through the QBI Settings section available from the Other Income sidebar (just below the Tax Treatment dropdown menu).

This article explains what QBI is, how it works at a high level, and how each QBI setting in Income Lab affects the calculation.

What is the QBI deduction?

The QBI deduction allows eligible taxpayers to deduct up to 20% of qualified business income from a qualified trade or business. The deduction is generally available for income from pass-through business activities, including:

• Self-employment income
• Partnership income
• S corporation business income
• Certain rental real estate income
• Certain other pass-through business income

QBI is not the same thing as gross revenue, cash flow, distributions, or total taxable income. It is generally the net amount of qualified business income, gain, deduction, and loss from a qualified U.S. trade or business.

For example, if a client has $100,000 of eligible QBI, the simplified deduction before other limitations may be:

$100,000 × 20% = $20,000

However, the actual deduction can be lower because QBI is subject to several limitations, especially for higher-income taxpayers.

QBI is calculated at the tax-return level

In Income Lab, QBI settings are entered on individual Other Income items and the actual deduction estimate is calculated by the software. In other words, you don't enter the QBI deduction amount. Instead, you simply make some settings and the deduction estimate will be included in the plan automatically.

That matters because QBI limits depend on the client’s overall taxable income, filing status, net capital gain, and other return-level facts. On a joint return, for example, one spouse’s wages, pension income, IRA distributions, or investment income can push the household above the QBI threshold and cause limitations to apply to the other spouse’s business income.

The software therefore uses the QBI settings on each applicable income item, then combines those results in the overall tax calculation for each year of the plan.

Which Income Lab tax treatments can use QBI settings?

In Income Lab, the QBI Settings modal is available when an Other Income item uses one of these Tax Treatment choices:

• Self-Employment
• Pass-Through Business Income
• Rental Income

These are the income types most likely to represent trade-or-business income that may qualify for the QBI deduction.

Other income types, such as wages, pensions, Social Security, tax-exempt interest, and general investment income, generally do not use this QBI modal. Wages paid to an employee are not QBI. S corporation shareholder wages are also not QBI, even though the shareholder’s pass-through business income may qualify.

The QBI deduction can also be affected by Qualified REIT Dividends, which can be entered when the Other Income item's tax treatment is set to Investment Income. See below for more on this.

The QBI Settings Modal

The QBI Settings modal tells Income Lab whether the income item should be included in the QBI calculation and, if so, how the software should treat it.

The modal includes the following settings.

1. Eligible for QBI Deduction: If this is set to No, Income Lab excludes the item from the QBI deduction calculation. The income item will still be taxed according to its selected Tax Treatment, but it will not generate a QBI deduction. If this is set to Yes, Income Lab treats the item as potentially eligible QBI and shows the additional QBI settings. 
   
   This is set to Yes by default for self-employment and pass-through business income, and to No for rental income. Rental income defaults to No because rental real estate does not automatically qualify for QBI. Some rentals qualify because they rise to the level of a trade or business or meet the IRS rental real estate safe harbor, but that determination is facts-and-circumstances based. Advisors should turn this setting on when they believe the rental activity qualifies.
    
2. Client materially participates in this business: This setting tells Income Lab whether the client is actively involved in the business. Income Lab uses this primarily for the post-2025 active-business minimum QBI deduction rules. Beginning in 2026, certain taxpayers with at least a minimum amount of QBI from an active qualified trade or business may be eligible for a minimum QBI deduction. Material participation is relevant to determining whether the business is active for that purpose. 
   
   The default is Yes for self-employment and pass-through business income. For self-employment income, the client often materially participates, so the default is Yes. This setting does not, by itself, determine whether the income is QBI-eligible. It affects specific QBI rules that depend on active participation.
    
3. QBI amount is different from income amount: This setting controls whether Income Lab should use the income item’s amount as the QBI amount or ask for a separate QBI amount. If set to No, Income Lab uses the income amount as the QBI amount. If set to Yes, the modal displays a separate QBI Amount field. This matters because the amount of cash flow entered in a planning projection is not always the same as the tax QBI amount. This is Yes by default for pass-through business income and no otherwise. For pass-through business income, Income Lab defaults this to Yes because K-1 income, cash distributions, and QBI are often different. When available, advisors should use the QBI amount reported with the K-1’s Section 199A information. See below for examples.
   
   1. QBI Amount: This is the amount Income Lab uses as qualified business income for this income item. Use this field when the QBI amount differs from the income or cash-flow amount entered elsewhere in the plan. For pass-through business income, this should generally be the QBI amount reported to the taxpayer with the K-1 Section 199A information, when available. The default is that this value is the same as the value entered in the “Amount” field for this income item.
       
4. Specified Service Business: A specified service trade or business, often abbreviated SSTB, is a service business in certain fields. Common examples include health, law, accounting, consulting, financial services, brokerage services, performing arts, athletics, and businesses where the principal asset is the reputation or skill of one or more owners or employees. This setting matters because QBI from an SSTB is treated less favorably for higher-income taxpayers. At lower taxable-income levels, SSTB status may not affect the deduction. But once taxable income exceeds the applicable QBI threshold, SSTB income may be partially phased out. Above the full phaseout range, an SSTB may generate no QBI deduction. This setting is not shown if the tax treatment is set to Rental Income.
    
5. Use detailed high-income QBI limits: This setting tells Income Lab whether the advisor wants to provide the additional business-specific inputs needed to model the high-income wage and property limits. For taxpayers below the applicable QBI taxable-income threshold, the QBI calculation is usually simpler. For taxpayers above the threshold, however, the deduction may be limited based on (a) whether the business is an SSTB, (b) W-2 wages paid by the business, and (c) Qualified property held by the business. If you answer ‘yes’ to use the detailed high-income QBI limits, you will be asked to fill out:
   1. W-2 wages paid by this business: This field is used to apply the high-income QBI wage limitation. It means W-2 wages paid by the business and allocable to this QBI activity. It does not mean the client’s personal W-2 wages from employment, and it does not mean wages paid to the client as an employee unless those wages are properly part of the business’s Section 199A wage information. This input is especially relevant for businesses with employees. For example, an operating business with payroll may preserve more of its QBI deduction at higher taxable-income levels because the W-2 wage limitation may support a larger deduction.
   2. Qualified property value for QBI: This is a user-friendly label for UBIA of qualified property, which means unadjusted basis immediately after acquisition of qualified property. This field is used in the high-income wage/property limitation. It can be especially important for rental real estate and property-heavy businesses because they may have significant qualified property even if they have little or no W-2 payroll. For higher-income taxpayers, the business-level wage/property limit is generally based on the greater of (a) 50% of W-2 wages paid by the business, or (b) 25% of W-2 wages paid by the business plus 2.5% of qualified property value for QBI. Income Lab uses the W-2 wages and qualified property fields together when detailed high-income QBI limits are enabled. These are not either/or fields; a business may have both W-2 wages and qualified property.

Examples of QBI amount different from income amount:

How the settings work together

The QBI settings work in layers. First, Income Lab determines whether the item is included in QBI at all. If Eligible for QBI Deduction is set to No, the item is excluded from QBI. If it is set to Yes, Income Lab determines the QBI amount. If QBI amount is different from income amount is set to No, Income Lab uses the income amount as QBI. If it is set to Yes, Income Lab uses the separate QBI Amount field.

Next, Income Lab determines whether SSTB limits may apply. If Specified Service Business is set to Yes, Income Lab applies SSTB treatment when the client’s taxable income is above the applicable threshold. If it is set to No, Income Lab treats the item as non-SSTB QBI.

Then, Income Lab determines whether detailed high-income limits should be applied. If Use detailed high-income QBI limits is set to No, the plan uses a simplified QBI estimate. If the client is above the QBI threshold, advisors should treat the result as an estimate because the actual deduction may depend on W-2 wages and qualified property. If Use detailed high-income QBI limits is set to Yes, Income Lab uses the W-2 wages and qualified property value entered in the modal to apply the wage/property limitation.

Finally, Income Lab considers whether the client materially participates in the business for rules that depend on active business participation, including the active-business minimum deduction rules beginning in 2026.

Practical guidance for advisors

For most planning cases, the default settings will produce a reasonable estimate:

• Self-employment income defaults to QBI-eligible.
• Pass-through business income defaults to QBI-eligible and asks for a separate QBI amount.
• Rental income defaults to not QBI-eligible unless the advisor determines the rental qualifies.

Advisors should pay special attention to QBI settings when:

• The client has meaningful self-employment income
• The client owns an S corporation or partnership interest
• The client has rental real estate that may qualify as a trade or business
• The client’s taxable income is near or above the QBI threshold
• The business is a specified service business
• The client’s K-1 reports separate Section 199A information
• The business has significant payroll or qualified property

QBI can materially affect projected taxes, especially for business owners and high-income clients. The Income Lab QBI settings are designed to capture the key facts needed for planning without requiring advisors to recreate every line of Form 8995 or Form 8995-A.

Qualified REIT Dividends from Investment Income

In addition to QBI from business and rental income, Income Lab also supports QBI treatment for Qualified REIT Dividends entered through an Investment Income Other Income item.

When an Other Income item has a Tax Treatment of Investment Income, advisors can specify what percentage of that income represents Qualified REIT Dividends. The software uses that percentage to calculate the dollar amount of qualified REIT dividends and includes that amount in the QBI calculation.

Qualified REIT dividends are handled differently from self-employment income, pass-through business income, or rental income. They are not treated as trade-or-business QBI from the client’s own business activity. Instead, they are part of the separate REIT/PTP component of the Section 199A deduction.

For example, if an Investment Income item is $10,000 and the advisor marks 40% as Qualified REIT Dividends, Income Lab treats:

The simplified QBI deduction associated with that REIT dividend amount would generally be:

$4,000 × 20% = $800

This amount is then combined with the rest of the client’s QBI calculation and remains subject to applicable return-level limitations, including the overall taxable-income limitation.

How this differs from business QBI

Qualified REIT Dividends do not use the QBI Settings modal. Advisors do not need to specify:

• Whether the client materially participates
• Whether the income is from a specified service business
• W-2 wages paid by the business
• Qualified property value for QBI
• Whether the QBI amount differs from the income amount

Those settings apply to trade-or-business QBI from Self-Employment, Pass-Through Business Income, and Rental Income. Qualified REIT Dividends are investment income that may still qualify for the Section 199A deduction, but they are not tied to the client’s active operation of a business.

Advisor guidance

Use the Qualified REIT Dividend percentage when part of an Investment Income item represents REIT dividends that qualify for the Section 199A deduction.

Do not use this field for:

• Ordinary dividends that are not qualified REIT dividends
• Long-term capital gains
• Tax-exempt interest
• General interest income
• Rental income from property directly owned by the client
• Pass-through business income reported on a K-1

If the advisor does not know what portion of the investment income represents Qualified REIT Dividends, the percentage should generally be left at 0% unless the plan is intentionally using an estimate.