Definition
A personal tax deduction for owners of pass-through businesses, meaning sole proprietors, partners, S corporation shareholders, and some landlords, equal to up to 20% of the business's qualified income. It is taken on the owner's return whether or not they itemize, and it does not reduce self-employment tax. Above income thresholds the IRS adjusts each year the deduction phases down, and owners of certain professional service businesses can lose it entirely.
Why it matters
For a freelancer or small-business owner this is one of the largest deductions available, and it requires no spending to earn. Because it depends on business income, structure, and total income, it is a reason entity choice and retirement contributions interact in ways a W-2 employee never sees.