Are You Eligible for the Qualified Business Income Deduction?

If you own a daycare, preschool, or in-home childcare program, the childcare QBI deduction is one of the largest tax breaks available to you. It can shave up to 20% off your taxable business income — but only if your structure, income, and documentation line up correctly. Below is a plain-English guide to who qualifies, who does not, and how to claim it.

What the Childcare QBI Deduction Is

The qualified business income (QBI) deduction is a federal tax break for owners of pass-through entities — sole proprietorships, partnerships, LLCs, S corporations, and certain trusts and estates. With every one of these structures, business profits flow through to the owner’s personal return, so the QBI deduction is also claimed on your personal 1040.

If your childcare business uses one of these structures, you can claim the childcare QBI deduction whether you itemize or take the standard deduction. In addition, the deduction does not reduce your business income for self-employment tax purposes — it only reduces the income tax you owe on your personal return.

Eligible owners can deduct up to 20% of qualified business income, plus 20% of qualified REIT dividends and qualified publicly traded partnership (PTP) income. QBI is the net total of qualified income, gains, deductions, and losses from a qualified trade or business. It generally includes the deductible portion of self-employment tax, self-employed health insurance, and contributions to qualified retirement plans. For the full federal definition, see the IRS QBI deduction page.

One important update: the QBI deduction was originally set to expire after 2025, but it was made permanent by the One Big Beautiful Bill Act signed in 2025. As a result, you can plan around it long-term.

Who Is Not Eligible for the Childcare QBI Deduction

It is easier to start with who is shut out. You cannot claim the QBI deduction if any of the following apply:

• You earn income as an employee (W-2 wages) of a company.
• You own your business through a C corporation.
• Your taxable income exceeds the IRS thresholds (currently around $394,600 for joint filers and $197,300 for all others for 2024 — these figures are adjusted annually for inflation).
• Your business is a “specified service trade or business” (SSTB) and you exceed the income thresholds above.

The SSTB list includes health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, investment management, trading, and dealing in securities. Childcare is not on the SSTB list — which is great news for daycare owners. Your business is treated as a “qualified trade or business” for QBI purposes, even at high income levels.

Above the income thresholds, the deduction is also limited by a wage-and-property formula. Tax pros calculate it as the lesser of: (1) 20% of QBI, or (2) the greater of 50% of W-2 wages, or 25% of W-2 wages plus 2.5% of the unadjusted basis of qualified property — whichever benefits the taxpayer most.

What Doesn’t Count as Qualified Business Income

The IRS also draws a line around what counts as QBI in the first place. The following items are excluded:

• Items not properly included in taxable income
• Capital gains, losses, and dividends
• Interest income not tied to a trade or business
• Wage income
• Income generated outside the United States
• Commodity transactions and foreign currency gains or losses
• Income, loss, or deductions from notional principal contracts
• Annuities (unless tied to the business)
• Reasonable compensation received from an S corporation
• Guaranteed payments from a partnership
• Payments received by a partner for services outside the partner role
• Qualified REIT dividends and PTP income (these get their own 20% line)

Who Is Eligible for the Childcare QBI Deduction

You qualify if both of the following are true:

• You earn income through a pass-through entity — sole proprietorship, partnership, LLC, S corporation, or qualifying trust or estate.
• Your taxable income falls within the IRS limits for your filing status (or, above the limits, you pass the wage-and-property formula).

Because childcare is not an SSTB, most daycare and preschool owners qualify for the full 20% deduction at lower-to-mid income levels and for a partial deduction at higher levels. If you are not sure which entity type you currently use, our guide on choosing the right business structure for your childcare business walks through every option.

How to Claim the Childcare QBI Deduction

Once you know you qualify, the mechanics are straightforward:

• If your taxable income is at or below the threshold, file IRS Form 8995, Qualified Business Income Deduction Simplified Computation.
• If your income is above the threshold, file Form 8995-A instead, which walks through the wage-and-property limitation.
• The total flows to line 13 of Form 1040 as a below-the-line deduction.

For deeper background on the rules, the IRS Section 199A FAQ is the most thorough free resource available.

Pair the QBI Deduction with Smart Tax Planning

The childcare QBI deduction is most valuable when it is part of a broader plan — not an afterthought at filing time. A few practical moves to consider:

• If you operate as an LLC and clear meaningful profit above a reasonable salary, an S corporation election can reduce self-employment tax — but it also reduces the QBI base. Run both scenarios.
• Track W-2 wages and depreciable property carefully if you expect to cross the income threshold; the wage-and-property test will determine your deduction.
• Stack the QBI deduction with every other childcare-specific tax break. See our roundup of the top tax deductions for childcare businesses.
• Build the conversation into your annual tax plan. Our guide on when to meet with your accountant covers the right cadence.

QBI eligibility, SSTB status, and the wage-and-property formula all have nuances that are easy to miscalculate. We strongly recommend working with a tax professional who knows childcare to make sure every dollar of the deduction lands on your return.

If your childcare taxes feel overwhelming, the team at Honest Buck Accounting can help. We work with daycare and preschool owners across the country to capture the QBI deduction along with every other credit and incentive you qualify for. Schedule a call with us today.