Do Restaurants Really Qualify for QBI? Avoid this Mistake + FAQs
- March 25, 2025
- 7 min read
Yes. Restaurants qualify for the Qualified Business Income (QBI) deduction, which is a 20% tax break for eligible pass-through businesses.
According to a 2024 National Federation of Independent Business survey, 47% of small business owners were unfamiliar with the QBI deduction, potentially missing out on thousands in tax savings each year.
This confusion can leave money on the table for restaurant owners operating on slim margins.
Which restaurants qualify: Discover all types of restaurant businesses (franchise or independent) that can claim the 20% pass-through tax deduction.
Federal rules explained: Learn how IRS Section 199A works, why restaurants are not “specified service” businesses, and how high-income owners can still qualify.
State-by-state differences: Find out which states allow or deny the QBI deduction (see the 50-state comparison table) and how that affects your tax bill.
Pitfalls to avoid: Avoid common mistakes – from misclassifying your business type to ignoring Treasury regulations – that could cost your restaurant this deduction.
Real examples & tips: See examples of how a small café vs. a multi-unit franchise claim QBI, plus a pros and cons breakdown and key terms (like W-2 wages and SSTB) made easy.
Do Restaurants Qualify for QBI? (Quick Answer)
Most restaurants do qualify for the 20% QBI deduction as long as they operate as pass-through entities (e.g. sole proprietorships, LLCs, partnerships, or S corporations).
If your restaurant’s profits are taxed on your personal tax return (not as a C-corporation), you likely can deduct 20% of that qualified business income from your taxable income. This deduction – established by the Tax Cuts and Jobs Act’s Section 199A – is available for tax years 2018 through 2025, giving restaurant owners a significant tax break during this period.
Crucially, restaurants are not categorized as “specified service trades or businesses” (SSTBs) in the eyes of the IRS. SSTBs (like law, accounting, or medical practices) face limits on QBI if owners earn above certain incomes. By contrast, running a restaurant (whether it’s a food truck or a fine dining bistro) is considered a qualified trade or business by default.
This means even higher-income restaurant owners can usually get the deduction (with some additional calculations, explained later) rather than being shut out entirely. The only major exception is if your restaurant is structured as a regular C-corporation – C-corps do not pass through income to owners, so those profits don’t qualify for QBI. But any pass-through restaurant – from a single-location mom-and-pop diner to a franchisee operating multiple units – can potentially enjoy this 20% deduction.
In short: If you own a restaurant through a pass-through entity, you can likely slice 20% off your business profits for federal tax purposes. For example, if your independent café earned $100,000 in net profit, you could deduct about $20,000 (20%) under QBI – which might save roughly $4,000+ in federal taxes (depending on your tax bracket).
This deduction boosts after-tax cash flow, letting you reinvest in kitchen upgrades, employee training, or simply improve your bottom line. Now, let’s break down exactly how it works and confirm your restaurant’s eligibility in detail.
Why Most Restaurants Qualify for the 20% QBI Deduction
To claim the QBI deduction, a business must be a “qualified trade or business” under IRS rules. Here’s why restaurants meet that definition and how different restaurant types fare:
Pass-Through Entity: The restaurant’s profits need to pass through to an owner’s personal tax return. This includes sole proprietorships (including single-member LLCs), partnerships (multi-member LLCs), and S-corporations. Most small and mid-sized restaurants use one of these structures. If your restaurant is an LLC or partnership, you’ll report its income on Schedule C or K-1 and then Form 1040 – that income is Qualified Business Income eligible for the deduction.
An S-corp’s shareholders similarly report the business income on their personal taxes. In contrast, if your restaurant is a C-corporation (paying corporate tax and possibly paying you dividends or a salary), neither the corporation nor you can claim QBI on those profits. Key point: Almost all independent and franchise restaurants are set up as pass-throughs, so they clear this hurdle easily.
Trade or Business Test: The enterprise must be engaged in a legitimate trade or business as defined by tax law (IRC §162). Restaurants clearly qualify – they’re ongoing ventures conducted for profit (selling food and beverages to customers). This is not a passive hobby or an investment; it’s an active business with daily operations.
Even if you run a seasonal food stand or a part-time catering service, as long as it’s regular and for-profit, it counts as a trade or business. (For completeness: rental activities sometimes need extra scrutiny to count as a business for QBI purposes, but a restaurant’s income from sales is active business income by default.)
Not an SSTB (Specified Service Trade or Business): The QBI rules exclude or limit certain service businesses (like doctors, lawyers, consultants) once the owner’s income is high. Fortunately, running a restaurant is not on the list of disqualified service fields. Restaurants provide products (food and drink) and a service experience, but they are not considered a personal service in the SSTB sense. In early IRS guidance, there was a catch-all clause for SSTBs: any business where the principal asset is the “reputation or skill” of the owners or employees. Some worried this vague language could snag restaurants – for example, a restaurant known mainly for a celebrity chef’s skill.
However, Treasury Regulations clarified this “reputation or skill” category very narrowly (covering things like endorsing products or paid appearances by celebrities). A restaurant’s normal revenue from serving meals is not treated as SSTB income, even if a chef is famous. Only side income directly tied to an individual’s celebrity, like a licensing deal for the chef’s name or cookware line, would be considered SSTB.
In practice, this means your restaurant business won’t be disqualified from QBI just because it’s successful or your chef is talented. (If you do have separate income from endorsements or personal appearances, that specific income stream might be SSTB, but it can be separated from your core restaurant profits.) Bottom line: restaurants are treated as qualified businesses, not SSTBs – a big win for restaurant owners compared to, say, high-earning consultants who can lose the deduction entirely.
Domestic Business: QBI only counts domestic business income – meaning your restaurant must be located in the U.S. (including Puerto Rico, which has special rules). If you own a restaurant abroad, that foreign income isn’t eligible for QBI. Nearly all small U.S. restaurants meet this requirement by default. Just note, if you’re a U.S. taxpayer with a restaurant in, say, Europe, that income wouldn’t count for this deduction (though you might have other exclusions).
Multiple Businesses: If you have more than one business, QBI is determined for each qualified business, but you can often aggregate (combine) multiple businesses on your tax return if they meet certain criteria (common ownership, same tax year, not an SSTB, etc.). For example, if you own a restaurant and a catering business, you can elect to treat them as one combined business for QBI purposes if it makes sense (and if you meet the IRS’s aggregation rules).
This can be helpful if one business has high profits and the other has lots of payroll or assets – combining can help maximize the deductible amount under the limitations discussed later. Aggregation is optional, but the takeaway is that owning multiple restaurants or related businesses won’t prevent you from claiming QBI. You just calculate QBI for each and then sum them up (with or without aggregation).
Losses and Carryovers: If your restaurant has a net loss in a year, you won’t get a QBI deduction that year (since there’s no positive qualified income to deduct from). However, that negative QBI isn’t wasted – it will carry forward to offset future years’ QBI. For instance, if 2023 was rough and you had a $20,000 loss, and in 2024 you have $50,000 profit, your QBI for 2024 would be $30,000 (after subtracting the carried loss), and you’d take 20% of that. Essentially, a loss year postpones your deduction until you’re back in the black. The key is that only positive qualified business income yields a deduction, and losses are tracked and applied against future QBI.
Virtually all “main street” restaurant businesses qualify for QBI. Whether you operate as a franchise owner under a big brand or an independent eatery, as long as your business’s legal form is a pass-through and you’re reporting that income on your personal return, you meet the broad eligibility.
There’s no special exclusion in the law targeting restaurants negatively – in fact, Congress intended this “small business tax deduction” to help exactly these kinds of businesses. The National Restaurant Association even noted that the QBI deduction is utilized by the vast majority of restaurants nationwide. The next step is understanding how the deduction is calculated and any limits that might apply, especially if your restaurant is very profitable or in a high-tax state.
How the QBI Deduction Works for Restaurant Owners (Federal Law Breakdown)
Even if your restaurant qualifies, the actual deduction amount can vary based on your income and payroll. Let’s unpack the mechanics of Section 199A so you know how to maximize it and avoid surprises:
Basic Calculation: 20% of Qualified Business Income
At its core, the QBI deduction is 20% of your qualified business income from the restaurant (plus 20% of any REIT dividends or public partnership income, but those are uncommon for most restaurateurs). Qualified business income (QBI) generally means the net profit your business earned domestically, with certain exclusions:
What counts as QBI: income from selling food and drinks, catering services, franchise fees you receive (if any), and basically any ordinary income generated by the restaurant’s operations. After you subtract all your ordinary business expenses (ingredients, wages, rent, etc.), the resulting taxable profit is QBI.
What’s excluded: certain types of income aren’t included in QBI even if earned through the business. For instance, capital gains or losses are excluded (e.g. if you sold a restaurant building at a gain, that gain isn’t QBI). Interest income (say, interest on a business bank account) and dividend income are also out. Also, any income earned as an employee is not QBI – important if you, the owner, also take a W-2 salary from your S-corp (that wage portion doesn’t count as QBI, only the remaining business profit does). Additionally, if you pay yourself guaranteed payments from a partnership, those payments are not QBI to you (nor to the partnership). In short, QBI is roughly equivalent to the taxable profit of your trade or business excluding investment-type income and owner compensation. Most line items on your Schedule C or K-1 that make up ordinary business profit will fall under QBI.
If you’re under certain income thresholds (we’ll cover them next), the calculation is simple: QBI deduction = 20% × QBI. For example, your small restaurant LLC shows a $50,000 profit on Schedule C – your QBI deduction is $10,000 (20% of $50k). This is the deduction amount that you’ll claim on your Form 1040 (it doesn’t come off your business books, but rather as a personal deduction). Keep in mind, the QBI deduction cannot exceed 20% of your overall taxable income after subtracting your standard or itemized deductions, excluding capital gains. In practice, for many business owners, taxable income is higher than business income so this cap isn’t hit, but it’s there to prevent someone from deducting more than their total income would allow. For instance, if you had a rare scenario where your only income was your restaurant’s $50k profit and you also took a large charitable deduction that brought your total taxable income down to $40k, 20% of taxable income ($8k) would be the limit rather than $10k. But generally, if you have income beyond the business (or not too many other deductions), the 20% of QBI is the figure that sticks.
Income Thresholds and Limitations (High-Income Scenarios)
The QBI deduction was designed to give full benefit to small and mid-sized businesses, while phasing out or limiting for very high-income owners in certain cases. There are two key thresholds to know:
For tax year 2023, the threshold taxable income (TI) level was around $182,100 for single filers and $364,200 for joint filers. (These amounts adjust annually for inflation; they were $157,500/$315,000 when the law began in 2018, and have risen each year.) If your total taxable income (including your restaurant profit and any other income, minus deductions) is at or below this threshold, congratulations – you get the full 20% of QBI with no further limitations. The deduction is straightforward regardless of business type – even SSTBs qualify fully below the threshold. In this “below-threshold” range, you don’t need to worry about wage or asset limits at all.
If your taxable income exceeds the threshold, two things come into play: (1) a potential limitation based on W-2 wages and depreciable assets, and (2) for SSTBs only, a phase-out of the deduction. As a restaurant owner (non-SSTB), you won’t face the SSTB phase-out – that’s the good news; your business doesn’t suddenly become ineligible just because you’re successful. However, you will be subject to the W-2 wage and asset limitation once you pass the threshold (after a phase-in range).
Let’s break down the W-2 wage and depreciable property limitation: Once you’re over the income threshold, the full 20% QBI deduction might be capped by how much your business pays in wages and/or owns in property. Specifically, the deduction for each qualified business is limited to the greater of either:
50% of W-2 wages paid by the business, or
25% of W-2 wages + 2.5% of the unadjusted basis of qualified property.
In plainer terms, if your income is high, Congress wanted to encourage you to have employees or investments in equipment/property to get the full deduction. They didn’t want someone with a very high-profit business and no employees reaping the entire benefit. Most restaurants, of course, do have employees (chefs, servers, staff) and often some property (ovens, furniture, maybe a building). So, many restaurants can still max out the deduction, but you have to run the numbers:
W-2 Wages: These are wages paid to employees that are subject to payroll tax reporting. This includes all your line cooks, servers, managers on payroll – and it also includes wages you pay yourself as an employee if you’re structured as an S-corp (or wages paid to any owner who draws a salary). It does not include payments to independent contractors (1099-NEC folks) or draws/profit distributions to owners. Only actual W-2 wages count. If you use a professional employer organization (PEO) or other third-party payroll provider to pay staff, don’t worry – the IRS regulations allow those wages to be allocated to your business for the QBI calculation, so you’re not penalized for outsourcing payroll. Just ensure you have records of those wages as related to your business.
Unadjusted Basis of Property: This refers to the original cost basis of tangible, depreciable property used in the business that is still within its depreciable period. For restaurants, think of things like your kitchen equipment, furniture, and possibly the building if you own it (not rent it). “Unadjusted basis” means you use the original cost, not reduced by depreciation. And you count it for the entirety of the depreciation period (usually 10 years or more, or until fully depreciated). For example, if you bought a $50,000 oven and grill setup, that full $50k would count for up to 10 years (even as its book value depreciates). The calculation allows you to take 2.5% of that unadjusted basis as part of the limit. Admittedly, 2.5% of a big number can still be small – e.g., 2.5% of $50k is $1,250. So property helps the limitation a bit, but wages typically have a bigger impact since 50% of wages can be a large number.
How the Limit Works: If you’re over the threshold, first you compute 20% of QBI as a starting point. Then you compare it to the two wage-based limits above. You pick the greater of the two limits (50% of wages or the 25% wages + 2.5% property formula). Your actual deduction is the lesser of (a) the 20% QBI or (b) that wage/property limit amount. If your business has plenty of payroll, often 50% of wages will exceed 20% of profits, in which case your deduction remains the full 20% of QBI. If payroll is low relative to profit, the limit might bite.
Example: You own a high-end restaurant as an LLC. Your taxable income (including your spouse’s income, etc.) puts you above the threshold. The restaurant’s net profit (QBI) is $500,000. You paid out $120,000 in W-2 wages to employees. You don’t own the building, and equipment basis after purchases is $100,000.
20% of QBI = $100,000.
50% of W-2 wages = $60,000.
25% of W-2 wages + 2.5% of property = $30,000 + $2,500 = $32,500.
The greater of the two wage tests is $60,000. Now compare: The 20% QBI ($100k) vs $60k limit – your deduction is capped at $60,000 in this scenario, because your wages were relatively low for that profit level. Essentially, you could only deduct 12% of your QBI instead of the full 20% because of the limitation. If you had paid more in W-2 wages, your cap would rise. In contrast, if you paid $250,000 in wages on that $500k profit (maybe you have many employees or high labor costs), 50% of wages = $125,000 which is higher than $100k (your 20% QBI). In that case, your full 20% ($100k) deduction is allowed (since the limitation wasn’t binding – you had sufficient wages to “cover” it).
Most small restaurants with moderate profits won’t hit this issue at all, since they might be under the income threshold or just at it. But for very profitable restaurants or owners with other income pushing them over the top, it’s smart to be aware of the wage/asset limit. The good news for restaurants is you naturally tend to have the elements (employees and equipment) to support a solid deduction. Also, because a restaurant is not an SSTB, even if you earn way above the thresholds, you still get a QBI deduction, albeit possibly reduced by this formula. An architect or attorney with the same income would get zero deduction (since SSTB status fully phases out past a certain point), whereas you at least get a partial deduction. This makes QBI planning worthwhile for successful restaurant owners.
Tax Planning Tip: If your restaurant is doing extremely well with high profit margins and you find the QBI deduction limited, consider whether you are appropriately staffing and compensating. It might sound odd (why pay more wages just for a deduction?), but if you’re an S-corporation owner paying yourself an unreasonably low salary, not only could that raise IRS compliance issues, it’s also hurting your QBI wage cap. Paying yourself (or other key staff) a bit more in W-2 wages can increase the allowable deduction (since 50% of a higher wage figure is higher). Of course, don’t let the tail wag the dog – business decisions should make sense beyond taxes. But the wage limit is a factor to keep in mind. Also, investing in property for your restaurant (new equipment or even buying your building) not only can boost business but also modestly improves your QBI limit (through the 2.5% factor) and provides depreciation deductions.
Claiming the Deduction
Claiming QBI is done on your individual tax return. For most, it requires filing IRS Form 8995 or 8995-A (the form depends on if you’re above the threshold or have multiple businesses). These forms will walk through the QBI calculation, including applying any limitations. If you use a tax professional or software, they handle the heavy lifting – but it’s good to understand the output. On the Form 1040, the QBI deduction shows up as a line item deduction below the line for adjusted gross income, as a “Qualified Business Income Deduction” (sometimes called the Section 199A deduction). It doesn’t reduce your self-employment tax or your business’s gross receipts; it purely reduces your taxable income for income tax purposes. Think of it like a bonus deduction after your standard or itemized deductions. The IRS also issues K-1 forms from partnerships/S-corps with codes that indicate the amounts of QBI, W-2 wages, and qualified property attributable to each owner, to help in preparing those forms.
One more nuance: The QBI deduction does not reduce your business income when calculating other things like self-employment tax or the net income for determining an S-corp owner’s reasonable salary. It’s solely an individual income tax deduction. Also, remember that this deduction is currently set to expire after 2025. Unless new legislation extends it (more on that later), tax year 2025 is the last year you can claim QBI. That doesn’t affect your eligibility now, but it’s something to keep an eye on for long-term planning (many in the restaurant industry are lobbying to make it permanent, given how much it’s helped).
Example Scenarios: How Different Restaurants Qualify (or Don’t)
To crystallize the rules, here are three common restaurant scenarios and how QBI would apply:
| Scenario | Restaurant Business Profile | QBI Deduction Eligibility | Explanation |
|---|---|---|---|
| 1. Family-Owned Cafe (below threshold) | Single-location café operated as a sole proprietorship (or single-member LLC). Owner’s taxable income is $120,000 (under the threshold). Profit from the cafe is $100,000. | Yes – Full 20% Deduction (about $20,000). | The owner qualifies for the full deduction because taxable income is below the threshold. The cafe is a pass-through business, not an SSTB, so no restrictions apply. The owner can deduct 20% of the $100k profit. No wage or asset limits kick in at this income level. This saves the owner thousands in federal taxes, easing the burden on their small business. |
| 2. Successful Bistro Group (above threshold) | An LLC partnership owns three upscale bistro locations. The business nets $600,000 profit. Owners are a married couple with joint taxable income of $500,000 (above the threshold). The bistros pay $200,000 in W-2 wages to staff and own $300,000 in depreciable assets (kitchen equipment). | Yes – Partial Deduction (capped by wages/assets). | Because their income is high, the 20% of QBI ($120,000) is subject to limitation. 50% of wages = $100,000, and 25% of wages + 2.5% of assets = $50,000 + $7,500 = $57,500. The higher of those limits is $100k, so their deduction is limited to $100,000 (instead of $120k). They still get a large deduction, but $20k is disallowed due to the wage cap (since wage $ were somewhat low relative to profit). If they increase payroll (or if profit dips), they could potentially claim more. Importantly, even though they’re above the SSTB phase-out range, their restaurant businesses remain eligible – only the formula limits the amount, not a total ban. |
| 3. Incorporated Franchise (C-Corp) | A franchisee operates 5 fast-food restaurant locations but chose C-corporation status for each. The corporations pay the owner a salary and dividends. | No – Not Eligible (for owner’s share of profits). | Because the restaurants are C-corps, their profits are taxed at the corporate level and any dividends to the owner are not QBI. The owner’s salary from the corporation is regular W-2 income (not QBI either). Neither the corporation nor the owner can claim a QBI deduction on those earnings. (If the owner instead structured these as pass-through entities, they could potentially claim QBI on the profits.) This scenario shows that entity choice matters: restaurants run as C-corps miss out on the 20% deduction available to pass-throughs. |
As you can see, Scenario 1 and 2 – which cover most small and midsize restaurant operations – get QBI deductions (full or partial). Scenario 3 is a reminder that a C-corp structure, while uncommon for small businesses, would mean no QBI break. Virtually every independent restaurant or franchisee running their own business will resemble Scenario 1 or 2, so the deduction is usually on the menu for them. The differences come down to income level and making sure you maximize wages or planning if you’re in that higher bracket.
State-by-State Differences in QBI (Do States Allow the 20% Deduction?)
While QBI is a federal tax deduction, you might be wondering how it affects your state taxes. This is a smart question – states often have their own rules and may not mirror federal law. In fact, many states do not allow the QBI deduction when calculating state income tax, which can lead to a higher state tax bill than you might expect.
Here’s why: For individual taxes, most states start their tax computation with either federal Adjusted Gross Income (AGI) or federal taxable income as a baseline, then make state-specific adjustments. The QBI deduction is taken after AGI, in arriving at taxable income on your federal return. So:
States that use federal AGI as the starting point will ignore the QBI deduction by default (since AGI doesn’t include it). You’d effectively add your QBI amount back in for state tax purposes, meaning no 20% break on your state return.
States that use federal taxable income as the starting point would, by default, include the QBI deduction (since it’s already subtracted in the federal taxable figure). However, several of those states passed laws to “decouple” from QBI – essentially instructing taxpayers to add it back or otherwise disallow it.
A few states chose to conform to Section 199A and allow a similar deduction (or a portion of it). It’s a patchwork, so let’s see the breakdown:
States that allow the QBI deduction: As of 2025, this list is short. Colorado, Idaho, and North Dakota fully allow the federal QBI deduction in state calculations (these states use federal taxable income as their starting point and have not disallowed 199A). Iowa moved to allow it as well – Iowa initially allowed only a percentage (25% increasing to 75% of the federal deduction in 2019-2022), but starting in 2023 Iowa adopted federal taxable income as its baseline, effectively allowing 100% of the QBI deduction going forward. If you’re a restaurant owner in one of these states, you benefit from the QBI deduction on both federal and state returns (at least partially in Iowa’s case historically, and now fully). That translates to additional tax savings at the state level.
States that do NOT allow QBI deduction: The majority of states with personal income tax have decoupled from Section 199A. For example, California does not conform to most of the 2017 tax changes, so no QBI deduction is allowed on a CA return – California uses its own AGI-based system and doesn’t give a special 20% break to pass-through income. New York and New Jersey likewise do not allow it (their taxes start from federal AGI and they haven’t enacted a similar provision). Minnesota explicitly decoupled from QBI when updating its tax code. Oregon decided not to allow the federal deduction, opting instead for its own reduced rate for pass-through income (more on that in a second). South Carolina initially used federal taxable income, but updated its laws to add back the QBI deduction, so it’s disallowed there too. In states like Illinois, Massachusetts, and others that start from AGI, the QBI never factors in to begin with.
States with no personal income tax: If you’re in a state like Texas, Florida, or Nevada (which have no state income tax on individuals), you don’t have to worry about any of this – there’s simply no state income tax to calculate, so the presence or absence of a QBI deduction is moot. Similarly, states like Tennessee and New Hampshire that tax only interest/dividend income don’t tax business income from an active restaurant, so QBI doesn’t apply.
Special cases: A few states have unique approaches. Oregon as mentioned has a special “Qualified Business Income reduced tax rate” for pass-through income instead of honoring QBI. Oregon taxpayers can elect a lower tax rate on their pass-through profits (if they meet certain employee and active participation requirements) which can save them money, but they must add back any federal QBI deduction first. So effectively, OR says “no QBI deduction, but we give you a different break.” Montana recently changed to use federal taxable income but explicitly requires adding back the QBI deduction in computing Montana taxable income (so no QBI benefit there; they did it to simplify calculations but not to give the deduction). New Mexico briefly allowed QBI for a couple years when they conformed to the 2017 code, but then decoupled by legislation (so currently no). Alabama, Arkansas, Mississippi and a few others are “selective conformity” states that didn’t adopt 199A, meaning they too require add-backs or start from AGI.
It’s important to be aware of your state’s stance because it can affect estimated taxes and cash flow. You might save 20% federally, only to find your state taxes that income fully. For instance, a California restaurant owner will still pay state tax on the full $100k profit, even though federally they only pay tax on $80k (after the deduction). This doesn’t negate the federal benefit, but it does mean your combined tax rate on that income isn’t reduced by a full 20%. Planning for that can prevent unpleasant surprises at tax time.
Below is a comprehensive table comparing how each of the 50 states treats the QBI deduction for individual income tax:
| State | QBI Deduction Allowed on State Return? | Details/Notes |
|---|---|---|
| Alabama | No | Alabama uses federal AGI as starting point and did not adopt a QBI provision. QBI is effectively added back for state taxes. |
| Alaska | N/A | No state income tax (no personal income tax, so QBI not applicable). |
| Arizona | No | Arizona starts from federal AGI; no state QBI deduction. AZ did not conform to Section 199A for personal taxes. |
| Arkansas | No | Arkansas did not conform to QBI. State taxable income is calculated without the federal QBI deduction. |
| California | No | California explicitly disallows the QBI deduction. CA uses its own tax code (based on 2015 IRC) and requires adding back any federal 199A deduction. |
| Colorado | Yes | Colorado uses federal taxable income, automatically including the QBI deduction. CO has fully conformed, so you get the 20% deduction for state tax as well. |
| Connecticut | No | Connecticut did not adopt the federal QBI deduction for personal income tax. (CT does have a passthrough entity tax workaround for SALT, but that’s separate – QBI isn’t allowed at individual level.) |
| Delaware | No | Delaware starts from federal AGI; no QBI deduction on DE returns. |
| Florida | N/A | No state personal income tax in FL, so no state filing or QBI concerns. |
| Georgia | No | Georgia conforms to most of IRC but uses federal AGI and specifically disallowed QBI. No deduction on GA return. |
| Hawaii | No | Hawaii did not conform to Section 199A; it uses a static conformity (2018 IRC without 199A). No QBI deduction for HI taxes. |
| Idaho | Yes | Idaho uses federal taxable income as base and allows QBI. No add-back in ID law, so the 20% deduction applies for Idaho taxes. |
| Illinois | No | Illinois starts with federal AGI. Additionally, IL requires adding back any QBI deduction if it were included. No QBI deduction on Illinois return. |
| Indiana | No | Indiana uses federal AGI; no QBI conformity. Full business income is taxed by the state. |
| Iowa | Yes (Phased-In) | Iowa phased in conformity: 25% of the federal QBI deduction allowed in 2019-20, 50% in 2021, 75% in 2022. Starting 2023, Iowa uses federal taxable income (post-QBI) as the starting point, effectively allowing 100%. So for 2023 onward, the full QBI deduction is reflected on Iowa returns. |
| Kansas | No | Kansas uses federal AGI; no QBI deduction on state taxes. |
| Kentucky | No | Kentucky did not allow QBI; KY taxable income computations exclude the federal deduction (KY had its own reform but no QBI equivalent). |
| Louisiana | No | Louisiana starts from federal AGI; no state QBI deduction provided. |
| Maine | No | Maine uses federal AGI; it has no provision to allow the QBI deduction on state returns. |
| Maryland | No | Maryland did not conform to 199A for individual taxes. QBI is not deductible on MD return (starts from AGI). |
| Massachusetts | No | Massachusetts tax law has its own income definitions (largely not tied to current federal code for business income) – no QBI deduction allowed. |
| Michigan | No | Michigan uses federal AGI; no QBI deduction on MI individual taxes. |
| Minnesota | No | Minnesota explicitly decoupled from QBI. MN requires an add-back of any federal QBI deduction when calculating MN taxable income. |
| Mississippi | No | Mississippi has selective conformity and did not adopt Section 199A. No QBI break on MS taxes. |
| Missouri | No | Missouri uses federal AGI; it did not allow the QBI deduction on state returns. |
| Montana | No | Montana now uses federal taxable income minus the QBI deduction as the start. In other words, MT law specifically removes the QBI deduction from its calculation (effective 2024). No QBI benefit in MT. |
| Nebraska | No | Nebraska starts from federal AGI; it did not pass legislation to allow QBI on state returns. |
| Nevada | N/A | No state income tax in NV. |
| New Hampshire | N/A | No broad wage income tax (NH’s tax is only on interest/dividends). Active business income isn’t subject to NH personal tax, so QBI is not relevant. (NH does have a Business Profits Tax at entity level, but that’s separate and doesn’t incorporate QBI.) |
| New Jersey | No | New Jersey uses its own income definitions, largely decoupled from 199A. No QBI deduction on NJ personal income tax. |
| New Mexico | No | New Mexico conformed to TCJA for a time but currently requires adding back the QBI deduction. As of now, no QBI deduction allowed on NM return. |
| New York | No | New York starts from federal AGI and does not allow the QBI deduction. NY taxpayers must pay state tax on that 20% as it’s added back in state calculations. |
| North Carolina | No | North Carolina uses federal AGI and specifically decoupled from certain TCJA provisions; no QBI deduction on NC taxes. |
| North Dakota | Yes | North Dakota uses federal taxable income and did not decouple from QBI. ND fully allows the 20% deduction for state income tax purposes. (ND also has relatively low tax rates, so pass-throughs get a double benefit.) |
| Ohio | No (but see note) | Ohio does not allow the federal QBI deduction on the personal return. However, Ohio has a generous separate deduction/exemption for business income (the first $250k of business income is tax-free on Ohio return, and remaining business income taxed at 3%). This is separate from QBI but effectively shelters a lot of business profit at the state level. So while technically “no” to QBI, OH owners often pay little state tax on business income anyway due to Ohio’s own small biz deduction. |
| Oklahoma | No | Oklahoma uses federal AGI; it has no state QBI deduction. (OK provides other limited passthrough incentives but not a 199A coupling.) |
| Oregon | No (alternate relief) | Oregon requires an add-back of any QBI deduction (it does not allow 199A directly). Instead, Oregon offers a reduced tax rate on pass-through income for qualifying businesses (tiers of 7%, 7.5%, 8% tax rates which are lower than the standard OR rates) if certain criteria are met. This is an entirely separate state benefit; effectively, OR chose a different route to aid small businesses. But the federal QBI deduction itself is disallowed on the OR return. |
| Pennsylvania | No | Pennsylvania’s income tax system doesn’t incorporate federal deductions like QBI. PA has its own flat tax on income with very few deductions – no QBI consideration. |
| Rhode Island | No | Rhode Island uses federal AGI; it has not allowed the QBI deduction on state filings. |
| South Carolina | No | South Carolina initially was a taxable-income conformity state, but it decoupled from QBI. SC now requires adding back the QBI deduction in computing state taxable income (the state stopped using federal taxable income directly). So no QBI benefit in SC. |
| South Dakota | N/A | No state income tax in SD. |
| Tennessee | N/A | No state income tax (TN’s Hall Tax on investment income was fully repealed as of 2021). |
| Texas | N/A | No state income tax in TX. |
| Utah | No | Utah uses federal AGI; no QBI deduction at state level. (UT did not carve out any deduction for 199A on individual return.) |
| Vermont | No | Vermont uses federal AGI and requires adding back federal QBI deduction (as part of TCJA decoupling). No QBI deduction on VT taxes. |
| Virginia | No | Virginia uses federal AGI; it explicitly does not conform to the QBI deduction. (As of 2023, VA lawmakers have discussed adding a partial deduction, but currently it’s not allowed, barring new legislation.) |
| Washington | N/A | No state personal income tax in WA. (Note: WA does have a business & occupation gross receipts tax, but that’s unrelated to QBI or income calculations.) |
| West Virginia | No | West Virginia uses federal AGI; no provision for QBI deduction on state return. |
| Wisconsin | No | Wisconsin has its own tax system and did not adopt Section 199A for individuals. WI requires adding back any federal QBI deduction. |
| Wyoming | N/A | No state income tax in WY. |
Table Key: “Yes” means the state fully honors the 20% QBI deduction (mirroring federal treatment). “Partial” indicates a portion is allowed (e.g., Iowa before 2023). “No” means the state disallows the deduction – you pay state tax on the full business income. “N/A” means not applicable (no state personal income tax).
As the table shows, most states tax your restaurant’s income without a QBI break, so plan accordingly. For instance, as a restaurant owner in New York, you’ll enjoy the 20% deduction on your federal return but still owe New York tax on that full income. In Colorado or Idaho, you effectively get to double-dip the deduction federally and at state level, which is a nice bonus. Keeping an eye on state legislation is wise – states occasionally change conformity. (Iowa and Montana recently changed methods; other states could adjust if the QBI deduction gets extended or made permanent federally.)
Pros and Cons of the QBI Deduction for Restaurant Owners
Like any tax provision, the QBI deduction has its advantages and limitations. Here’s a quick look at how it benefits restaurant owners and what to be mindful of:
| Pros (👍) | Cons (👎) |
|---|---|
| Significant Tax Savings: Lowers your federal taxable income by 20% of your restaurant profits, potentially saving thousands of dollars every year – extra cash to reinvest in your business. | Complex Rules for High Earners: Once income exceeds the threshold, calculations get complicated (wage & property limits). High-income restaurant owners must navigate formulas to determine the exact deduction. |
| Not Subject to SSTB Phase-Out: Unlike certain professionals, restaurateurs (even successful ones) don’t get kicked out of the deduction due to the “specified service” rule. You can qualify regardless of how well-known or profitable your eatery becomes. | Temporary Benefit: The deduction is set to expire after 2025 unless extended by Congress. This creates uncertainty for long-term planning – your tax burden could jump in 2026 without this deduction. |
| Encourages Business Investment: The structure incentivizes paying wages and investing in property (equipment, etc.), which restaurants naturally do. You’re rewarded for supporting employment and growth (aligning tax savings with business development). | Limited (or No) State Benefit: Many states don’t allow the QBI deduction, meaning you might not see any tax relief on your state return. You must still pay full state taxes on income that’s deducted federally, adding complexity to your tax picture. |
| Broad Eligibility: Easy to qualify for most – any common restaurant entity (LLC, S-corp, partnership, sole prop) can use it. No need to apply or get approval – it’s an automatic deduction if you have positive qualified income. | Excludes Certain Income Components: QBI doesn’t include items like capital gains, interest, or owner W-2 wages. Also, S-corp owner’s reasonable salary requirement might conflict with maximizing QBI (if you try to minimize salary for more QBI, you risk IRS issues). |
| Levels the Playing Field: Helps pass-through small businesses like restaurants achieve a tax rate closer to big C-corps (which got a 21% rate). QBI deduction effectively lowers many owners’ top tax rate from 37% to ~29.6%. This keeps local restaurants competitive and encourages entrepreneurship. | Additional Compliance: Requires filing an extra form (8995/8995-A) and maintaining records of wages and asset basis for the calculation. For multi-business owners, aggregation decisions and record-keeping add to the compliance burden. |
Overall, the pros are substantial for the typical restaurant owner – a straightforward tax cut with minimal effort – but the cons highlight areas to watch (especially the sunset date and complexity at higher incomes).
Avoid These Common Mistakes
When dealing with the QBI deduction, restaurant owners should be careful to avoid missteps that could reduce their deduction or draw IRS scrutiny. Here are some common mistakes and how to avoid them:
Mistake 1: Assuming your C-Corp qualifies. As emphasized, only pass-through entities qualify. If you incorporated your restaurant as a C-corporation (perhaps to attract investors or for another reason), you cannot claim a QBI deduction on corporate profits or dividends. Fix: Consider electing S-corp status if feasible, or operating new locations via an LLC/partnership. If you’re stuck with a C-corp (or prefer it for non-tax reasons), be aware you’re trading off the QBI benefit for those other considerations.
Mistake 2: Forgetting to claim the deduction. It sounds silly, but amid the paperwork many owners simply overlook the QBI deduction, especially if doing taxes without a professional. Remember, QBI doesn’t show up on your business’s Schedule C or partnership return – it’s claimed on your 1040. If you don’t file the Form 8995/8995-A when required, you might miss the deduction entirely. Fix: Always inform your tax preparer or tax software that you have qualified business income. Double-check your 1040 for a line labeled “Qualified business income deduction”. The IRS won’t automatically apply it; you have to compute and claim it.
Mistake 3: Misclassifying employees vs contractors. Some restaurant owners attempt to treat workers as independent contractors to save on payroll taxes. Aside from legal issues this can raise, it also means those payments aren’t W-2 wages – which could hurt your QBI wage limit if you’re in the high-income range. If you’re above the threshold with few or no official W-2 employees, your QBI deduction could be drastically limited (even to $0) for lack of W-2 wages. Fix: Ensure legitimate employees are classified as such and issued W-2s. This not only keeps you compliant with labor laws and avoids penalties, but also maximizes your potential QBI deduction if you’re subject to the wage cap. Paying yourself a reasonable W-2 salary if you’re an S-corp is part of this; don’t forego a salary entirely in hopes of more QBI – that strategy backfires because the wage limit will then be zero, eliminating the deduction above the income threshold.
Mistake 4: Underpaying yourself as an S-Corp owner. Related to above, S-corp restaurant owners might be tempted to minimize their own salary to push more income into the “profit” bucket that gets the 20% deduction. While a modest adjustment of salary vs distribution can be smart tax planning, going too far is risky. The IRS requires S-corp owners to take “reasonable compensation” for their work. If you pay yourself next to nothing but take large distributions, you not only flag an audit risk, but the IRS could reclassify some of your distributions as wages (which would impose back payroll taxes and penalties). Fix: Work with a tax advisor to determine a reasonable salary based on your duties, location, and profits. You can still benefit from QBI on the remaining profits, but striking a balance is key. Remember, a slightly higher salary (while reducing QBI) might not hurt you overall – wages are still deductible by the S-corp and count toward the QBI wage cap. The goal is to optimize taxes without breaching IRS rules.
Mistake 5: Ignoring the “aggregation” option for multiple businesses. If you have, say, two restaurants and a catering venture, and one has high profits with low wages while another has lower profit with high wages, failing to aggregate could limit your QBI deduction for the high-profit business. Fix: Consider aggregating your businesses on your tax return if you meet the criteria (common ownership, same year-end, not an SSTB, and businesses are related — e.g., offering similar services or are part of integrated offerings). Aggregation treats them as one combined business for QBI purposes, potentially allowing wages from one to support the deduction for profit of another. This can be complex, so consult a professional, but it can yield a bigger deduction. Conversely, don’t aggregate businesses that aren’t eligible or beneficial to aggregate – improper aggregation (such as combining an SSTB with a non-SSTB or businesses with different ownership) could be challenged.
Mistake 6: Overlooking state tax adjustments. As discussed, many states require you to add back the QBI deduction when figuring state taxable income. If you ignore this, you might underpay state taxes and get hit with a tax notice or penalty later. For example, a New York restaurant owner who deducts 20% on federal must add that 20% back on the NY return – effectively paying state tax on the full income. Fix: Always review your state’s treatment. Tax software usually handles it (by adding an “addition” on the state form for the QBI amount), but if doing manually, be vigilant. Knowing this also helps with cash flow – you might reserve some of your tax savings from federal to cover the higher state tax, so there’s no shortfall.
Mistake 7: Not planning for 2026 and beyond. It’s easy to get accustomed to the tax break and not realize it’s temporary. If you sign a long-term lease or loan assuming your after-tax income will always benefit from QBI, 2026 could shock you with a higher tax bill. Fix: Stay informed on tax law changes. As of now, QBI goes away in 2026. Congress may extend or modify it (there have been bills like the Main Street Tax Certainty Act aiming to make it permanent, but nothing is law yet). It’s prudent to run projections for 2026 with no QBI deduction. This way you can prepare – perhaps setting aside a bit more for taxes or adjusting your business spending – so you aren’t caught off guard. In short, enjoy the tax break now but have a contingency for if it disappears.
By steering clear of these pitfalls, you can fully capitalize on the QBI deduction while staying compliant. Many of these mistakes are avoidable with a bit of knowledge and good bookkeeping. When in doubt, consult a CPA or tax advisor who understands small business and pass-through taxation – a short consultation can save a lot of headache and money.
Related Entities and Terms to Know
(As a savvy business owner or tax professional, it helps to know these related entities and concepts often mentioned alongside QBI in discussions:)
IRS (Internal Revenue Service): The U.S. tax authority that enforces the Section 199A rules. The IRS issued regulations and guidance (nearly 300 pages worth) to clarify how QBI works. While Congress wrote the law, the IRS’s regs fill in the fine print that taxpayers must follow (e.g., definitions of SSTB, how wages are allocated, anti-abuse rules, etc.). It’s the IRS you’d interact with if there’s an audit or questions on your QBI deduction.
Section 199A: The section of the Internal Revenue Code (part of the 2017 tax law) that contains the QBI deduction provisions. You might hear tax pros refer to the “199A deduction” – that’s the QBI deduction. It includes various subsections about limits, definitions, and special cases. If you ever want to do a deep dive, searching “26 USC 199A” will get you the law text.
Treasury Regulations (1.199A regs): The Treasury Department (which oversees the IRS) issued detailed regulations interpreting Section 199A. For example, Reg. §1.199A-1 through §1.199A-6 cover everything from calculating QBI to defining SSTBs to anti-abuse rules (like preventing people from spinning off parts of an SSTB to claim QBI). These regs have the force of law. One notable portion, Reg. 1.199A-5, clarified what counts as an SSTB – crucial for restaurants, it explained the “reputation or skill” clause doesn’t pull in restaurants except for income from endorsements/likeness, etc. Another part clarified how rental real estate can qualify as a trade or business (via a safe harbor, Notice 2019-07 – possibly relevant if you lease property to your restaurant via a separate entity). While you as an owner don’t need to memorize these, understanding that guidance exists for tricky areas is useful. Your tax advisor relies on these regs to properly calculate and substantiate your deduction.
Specified Service Trade or Business (SSTB): As mentioned, these are certain service fields that lose QBI eligibility above the income threshold. Examples: health, law, accounting, consulting, athletics, financial services, performing arts. Notably, restaurants are not SSTBs. However, if a restaurant owner also has a side business in an SSTB field, that separate business would face limits. Also, if you have a portion of business income from something like paid appearances (e.g., a well-known restaurateur doing paid cooking demos or consulting for a fee), that portion could be treated as SSTB income and carved out if you’re above the threshold. Understanding SSTB matters mostly to know that your restaurant stays in the “good” category of businesses for QBI.
QBI Components on K-1: If your restaurant is a partnership or S-corporation, the Schedule K-1 you receive each year has codes (typically in box 20 for partnerships, box 17 for S-corps) for Section 199A info. This includes code Z (for partnerships) or code V (for S-corps) usually, which then refers to statements showing your share of QBI, W-2 wages, UBIA (unadjusted basis) and maybe SSTB info. These codes aren’t intuitive to non-professionals, but they essentially report the pieces needed to claim the deduction. Make sure you provide these K-1 details to whoever prepares your 1040 – it’s not just the income number, but those extra codes that matter for QBI.
Main Street Tax Certainty Act: A proposed federal bill (with bipartisan support) that aims to make the QBI deduction permanent (removing the 2025 sunset). Organizations like the National Restaurant Association and NFIB support it, arguing that small businesses need certainty and parity with corporations. While not law yet, it’s an entity to be aware of: if passed, it would extend this 20% deduction beyond 2025, which is obviously of great interest to entrepreneurs and restaurant owners planning for the future.
Tax Cuts and Jobs Act (TCJA) of 2017: The broader tax reform law that introduced Section 199A. This law cut the corporate tax rate and created the QBI deduction to give pass-through businesses a benefit too. Many provisions of TCJA (including QBI) expire in 2025. The context here is that QBI was part of a major overhaul of the tax code – understanding that helps explain why some states haven’t conformed (they didn’t adopt all TCJA changes) and why it has an expiration date.
Having these entities and terms in your back pocket can deepen your understanding and credibility when discussing QBI. You might not need all of them in day-to-day operations, but if you consult with a CPA or attorney, these terms will come up. Now, let’s address some frequently asked questions that often arise:
FAQs
Do franchise restaurant owners qualify for the QBI deduction?
Yes. Owning a franchised restaurant still means you’re a pass-through business owner, so you qualify just like an independent restaurant owner. The franchise status (paying royalties, using a brand) doesn’t remove your eligibility.
Is a restaurant considered a “specified service” business that could lose the QBI deduction?
No. Restaurants are not on the specified service trade or business (SSTB) list under Section 199A. So even at high income levels, your restaurant remains eligible for QBI (unlike, say, a law firm).
My restaurant is an LLC – do I get the 20% QBI write-off automatically?
Yes. If your LLC’s income is passed through to you (as a sole proprietorship or partnership), you can claim the 20% QBI deduction on that profit. Just be sure to actually calculate and claim it on your tax return.
Do I need employees to claim the QBI deduction for my restaurant?
No. You can claim QBI even if you have no employees, as long as you’re under the income threshold. If your taxable income is high, having W-2 employees (or property) becomes important to avoid a reduced deduction, but below the threshold it doesn’t matter.
Does the QBI deduction apply to a chef’s W-2 salary from a restaurant?
No. W-2 wages are not qualified business income. If you’re an employee (even if you’re the owner working as an employee of your S-corp), your wage portion isn’t eligible. The deduction is for business profits passed through, not wages.
My restaurant had a loss this year – can I still get a QBI deduction?
No. A QBI deduction only comes from positive business income. If your restaurant operated at a loss, there’s no deduction now – instead, that loss will carry forward to offset QBI in future profitable years.
Will the QBI deduction go away after 2025 for my restaurant?
Yes. Under current law, the QBI deduction expires at the end of 2025. Unless new legislation extends it, restaurant owners (and all pass-through businesses) won’t get the 20% federal deduction starting in 2026.
Can I claim the QBI deduction on my state taxes?
No (in most states). Most states do not allow the 20% QBI deduction on their income tax. A few do (e.g., Colorado, Idaho), but generally you only get the benefit on your federal return, not the state.
If I own multiple restaurants, do I calculate one QBI deduction for all?
Yes. You can combine (aggregate) multiple qualified businesses if you meet the rules, or calculate them separately and sum up the deductions. Either way, on your tax return you’ll effectively take one combined QBI deduction covering all your restaurant businesses.
Do tips received at my restaurant count as QBI?
Yes. Tips that are part of your restaurant’s gross receipts and paid out to employees become part of your wage expense, and any portion of tips that end up as income to the business (if any) would be in your net profit. Typically, tip income is passed through to employees (not business profit), so it doesn’t significantly factor into QBI. The main point: the business’s net profit (after paying out tips as wages) is QBI.