QBI (Qualified Business Income) is a deduction that allows eligible businesses to deduct up to 20% of their income from federal taxes. For LLCs, sole proprietors, and other pass-through entities that do not pay corporate-level income taxes, that is a huge benefit. While it was initially a temporary tax cut made in 2017, it’s now permanent as of 2026.

If you want to look into the semantics, there are plenty of articles out there covering the “why” behind QBI. But for the purposes of this article, we will get into business structuring, small business finances, and how all of that can work in conjunction so you can make the most of your capital.

Who Qualifies for the QBI Deduction
On paper, it seems great. Instead of getting taxed on 100% of your income, eligible businesses can now get up to 20% completely untaxed. The catch is that not everyone can reap those benefits. QBI is designed for pass-through entities. If your business income flows through to your personal tax return, you’re likely in the conversation. Sole proprietors, LLCs, partnerships, and S-Corps should all know about this.

For high-income earners, not everything counts. Wages, capital gains, and some investment income are excluded from the calculation. So, a side hustle could qualify, but it needs to be a legitimate business with real income and trackable expenses. People who lose this deduction often do not have clear enough financial information to support it. If everything in your business runs through one account, it gets tricky. Payments come in, expenses go out, personal finances get mixed in, and by the end of the year, it’s hard to separate what’s actually business funds from everything else. To claim the deduction, you need to have your finances straightened out.

Separate Accounts Change Everything
So, if you’ve determined that you are a pass-through entity and have the potential to take advantage of QBI, here we go. A good way to show the IRS you qualify for QBI is by separating your business’s finances from your personal banking. Think of it like this: if you have a separate account for your personal finances and your business expenses, it will be easier to take care of. Even better, having your business account separated between operations, taxes, and profit will make things even clearer. The IRS is looking for clean records. If you have receipts, invoices, and a clear paper trail coming from your account, it will look better.

That’s where we come in. We can help you set up accounts that are dedicated to each lane so you can be clear where funds are coming and going. Records like these help support deductions. Plus, there’s another layer to this. At some point, your business might need access to capital. Maybe you need to purchase expensive equipment or expand. Large banks tend to rely on strict approval models. If your business doesn’t fit neatly into their rules, you probably won’t get approved.

However, community banks like us tend to look at the full picture. Aspects like your history, your consistency, and your role in the community. It’s not a guarantee, but we’ve been told by business owners that they wouldn’t have gotten a loan without us, simply because of our evaluation process.

The Essence of QBI
The QBI deduction favors pass-through entities that have a valid structure in place. If your numbers are clear and easy to claim, your case for deduction will be easier to support.

Another way to boost your chances of qualifying is to reduce your taxable income. You can max out your retirement accounts by contributing to your 401(k), deferring income to repairs/expenses, donating to charities, and hiring more employees. While it’s best to look at thresholds and ways to qualify with a CPA, these are just a few ideas to get your brain going.

If you have any questions about QBI, our team at First State Bank is here to help. We can help you open accounts for your business, answer questions about qualifying, and support the growth of your local business.
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DISCLAIMER

The views expressed are those of the author and are intended for general informational purposes only. This content should not be considered financial, legal, tax, or investment advice.

Readers should consult a qualified professional before making financial decisions, as individual circumstances vary. Nothing in this article constitutes an offer or recommendation of any specific product or service.