The QBI Phase-Out for Physicians, Explained

The Section 199A qualified business income deduction lets owners of pass-through businesses — sole proprietorships, partnerships, S-corporations — deduct up to 20% of their qualified business income. For most small business owners, this is one of the single largest deductions available, worth tens of thousands of dollars a year at moderate income levels.

Physicians, along with several other professions, don't get to rely on it the same way. Health services are classified as a "specified service trade or business," or SSTB, under the statute — a category that also includes law, accounting, consulting, and a handful of other fields built around the reputation or skill of an individual. For an SSTB, the 20% deduction phases out entirely once taxable income crosses a threshold, and is fully gone above a second, higher threshold — with no deduction available at all past that point, regardless of how the practice is structured.

The thresholds are the same ones that apply to every taxpayer's QBI calculation, but for an SSTB they function as a cliff rather than a gentle reduction: below the lower threshold, the full 20% deduction is available; in between, it phases down; above the upper threshold, it's zero. Most practicing physicians, particularly specialists and multi-physician group partners, fall above that upper threshold most years — meaning the deduction other business owners count on simply isn't available to them.

This is where the planning conversation for a medical practice has to be different from the one for a typical small business. Since the QBI deduction itself isn't a workable lever above the threshold, the levers that actually move the needle are ones that reduce taxable income directly, before the QBI calculation even applies: retirement plan contributions, entity and compensation structuring, and timing of income and elective deferrals. A cash balance retirement plan in particular can create a contribution deduction large enough to meaningfully affect where a partner's income sits relative to other thresholds in the return, on top of building real retirement savings.

The mistake we see most often isn't a physician missing the QBI phase-out — most know it exists in general terms. It's stopping the analysis there, treating the deduction's unavailability as the end of the conversation instead of the reason to look at retirement plan design and entity structure more carefully than a non-SSTB business would need to.