When does the QBI deduction phase out?

Why does your side consulting work get less valuable the more you earn from everything else? Because of how the qualified business income deduction phases out. The QBI deduction lets owners of pass-through businesses, sole proprietors, partnerships, S corporations, deduct up to 20% of their business income. For a semi-retired consultant or board member, that’s a fifth of the income coming off the top tax-free. But above an income threshold the deduction shrinks, and for certain professions it vanishes entirely.

The catch for service businesses

The tax code draws a line around “specified service trades or businesses,” consulting, law, medicine, financial advice, and most fields where the product is your own expertise. For these, the 20% deduction phases out completely once your taxable income climbs past the threshold. Own a manufacturing or product business and you keep a deduction (capped by wages paid and property owned) even at high income. Sell your brain, and above the line you get nothing.

The deduction was made permanent under the 2025 tax law, so this isn’t a sunset you can wait out. It’s a planning problem you manage every year you have business income.

The part most people miss

Here’s the second-order effect that stings. The phaseout runs on your total taxable income, not just your consulting profit. So the Roth conversion you ran to fill up a low bracket, the capital gain you harvested, the required minimum distribution that just kicked in, each one lifts taxable income and can push you through the QBI threshold.

That means a conversion doesn’t just cost its own tax. It can quietly kill the 20% deduction on your consulting income at the same time. Two strategies you ran for good reasons can cancel each other unless you size them together.

If your accounts are large

Coordinate, don’t optimize in isolation. In a year you want a large conversion or sale, know it may sacrifice the QBI deduction, and weigh the lifetime value of the conversion against the deduction you’re giving up. In a year you want to protect the deduction, keep other income down: defer the conversion, hold the gain, lean on Roth or cash for spending. Contributing earned income to a solo 401(k) can also pull taxable income back under the threshold and rescue the deduction.

The QBI deduction rewards business income right up until your other income takes it away. Watch the full taxable-income picture, not just the consulting line, and you keep the 20% working instead of watching it disappear.