Case Study: A Growing Therapy Practice Loses the QBI Deduction It Was Counting On

The numbers below are run through this site’s own calculators, not estimated by hand. The business is a composite, not a real client — this site isn’t attached to a firm and doesn’t have any.

The practice

A solo licensed marriage and family therapist in Boulder, now seven years into private practice — mostly private-pay clients, plus a smaller panel of insurance-billed clients added two years ago to diversify referrals, a mix of in-person and teletherapy. Business has grown steadily, and this year net profit lands around $320,000. She elected S-corp status two years ago on a CPA’s advice and pays herself a $110,000 salary, with the rest distributed. By every measure that matters day to day, the practice is a real success story.

The deduction she was expecting

The Qualified Business Income deduction lets many pass-through business owners deduct up to 20% of their business income before it’s taxed. It comes up constantly in small-business circles, and she’d heard about it from other self-employed friends for years. What doesn’t come up as often: the deduction phases out for certain licensed and specialized fields — “specified service trades or businesses,” or SSTBs — once taxable income clears a threshold, and health is explicitly one of those fields.

At her income level, the practical effect is dramatic. Run the same profit and the same $110,000 salary through the calculator twice — once correctly flagged as an SSTB, once as if it weren’t — and the gap is the entire deduction, not a reduced version of it.

For a non-SSTB business at the same income and the same salary, the W-2 wage paid would have preserved most of the deduction. For an SSTB, that escape hatch doesn’t exist — the deduction phases toward zero regardless of salary.

What still helps: the election itself, on its own merits

It would be easy to read the QBI result and wonder whether the S-corp election was worth it at all. It’s a fair question with a clear answer: the S-corp election and the QBI deduction are unrelated provisions. The election’s benefit is capping self-employment tax exposure to the W-2 salary instead of the full profit — and that part of the math is untouched by SSTB status.

What would actually move the needle

Since salary and entity structure don’t reach the SSTB phase-out, the levers that do are the ones that reduce taxable income directly — maximizing retirement plan contributions, timing discretionary income or major equipment purchases across tax years, and for a household filing jointly, whether a spouse’s income shifts which threshold and phase-out range applies. None of these fully restore the lost deduction at this income level, but they’re the actual available options, as opposed to a workaround that doesn’t exist for this specific tax provision.

A separate, more immediate issue: getting paid on time

None of this touches the practice’s day-to-day cash flow, which has its own wrinkle worth planning around on the insurance-billed side: those reimbursements arrive weeks after a session is billed, not on the day it happens, the way a private-pay session does. That’s a completely different problem from the QBI phase-out, and one worth sizing on its own — see the reimbursement lag math for how much of a cash buffer that actually calls for.