Key Takeaways
- The qualified business income (QBI) deduction under IRC Section 199A lets eligible owners of pass-through businesses deduct up to 20% of their qualified business income.
- The One Big Beautiful Bill Act, signed July 4, 2025, made the deduction permanent; it had been scheduled to expire after 2025.
- Above an income threshold, the deduction can be limited by W-2 wages paid and business property, and owners of specified service businesses can lose it entirely.
- Starting in 2026, the phase-in range above the threshold widens to $75,000 for single filers and $150,000 for joint filers.
- Owners claim the deduction on IRS Form 8995 or Form 8995-A.
The QBI deduction lets owners of sole proprietorships, partnerships, LLCs, and S corporations deduct up to 20% of their qualified business income from federal taxable income. Below an income threshold, most owners get the full 20%. Above it, wage, property, and service-business limits can reduce or eliminate the deduction.
For pass-through owners, Section 199A is one of the largest deductions in the tax code, and it is now permanent. Certified Maverick, the certification and directory network for tax strategists founded by David A. Perez, trains advisors to plan around its limits each year. This guide explains how it works in 2026.
What Is Qualified Business Income?
Qualified business income is the net income from a qualified U.S. trade or business operated as a sole proprietorship, partnership, LLC, or S corporation. IRC Section 199A defines it, and IRS Form 8995 instructions explain how to calculate it.
QBI does not include:
- Wages an S corporation owner receives as salary
- Guaranteed payments to partners for services
- Capital gains and losses, dividends, and most interest income
- Income earned outside the United States
- Income from a C corporation
Who Qualifies for the QBI Deduction?
Owners of pass-through businesses generally qualify, including sole proprietors, partners, LLC members, and S corporation shareholders. Some trusts and estates also qualify. Qualified REIT dividends and publicly traded partnership income are eligible as a separate category. C corporations and their shareholders cannot claim it.
How Is the QBI Deduction Calculated?
The basic calculation has three parts:
- Start with 20% of QBI for each qualified business.
- Apply limits if your taxable income is above the threshold. These are the W-2 wage and property limit and the specified service business rules described below.
- Apply the overall cap. The total deduction cannot exceed 20% of taxable income minus net capital gain.
For example, a sole proprietor with $100,000 of QBI and taxable income below the threshold could deduct $20,000, as long as 20% of taxable income (minus net capital gain) is at least that amount.
What Are the 2026 Income Thresholds and Limits?
Below the threshold, the wage and service-business limits do not apply. For 2026, the threshold is $201,750 for most filers, $201,775 for married filing separately, and $403,500 for married couples filing jointly.
Above the threshold, two limits phase in:
| Limit | How it works |
|---|---|
| W-2 wage and property limit | The deduction for each business is capped at the greater of 50% of W-2 wages paid, or 25% of W-2 wages plus 2.5% of the unadjusted basis of qualified property |
| Specified service trade or business (SSTB) | Owners of service businesses lose the deduction gradually above the threshold and entirely at the top of the phase-in range |
| Phase-in range (from 2026) | $75,000 above the threshold for single filers and $150,000 for joint filers, widened from $50,000 and $100,000 |
What Is a Specified Service Trade or Business?
An SSTB is a business in fields the law treats differently for QBI. These include health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, and any business whose main asset is the reputation or skill of its owners or employees. Engineering and architecture are specifically excluded from the SSTB list. Owners of SSTBs get the full deduction only when their taxable income is below the threshold.
What Changed for 2026?
The One Big Beautiful Bill Act, signed July 4, 2025, made three main changes to the Section 199A deduction for 2026 and later years:
- Permanence. The deduction no longer expires after 2025.
- Wider phase-in range. Starting in 2026, the range over which limits phase in grows to $75,000 for single filers and $150,000 for joint filers.
- Minimum deduction. Starting in 2026, taxpayers with at least $1,000 of QBI from active businesses in which they materially participate can claim a minimum deduction of $400, indexed for inflation.
How Can Business Owners Plan Around the QBI Deduction?
- Manage taxable income near the threshold. Retirement contributions and other deductions can keep income below the level where limits apply.
- Set S corp salaries carefully. Salary reduces QBI but counts as W-2 wages for the wage limit, so the best salary balances both, within reasonable compensation rules.
- Review rental real estate. Rental activity can qualify as a trade or business; IRS Revenue Procedure 2019-38 offers a safe harbor for some rentals.
- Consider aggregation. Related businesses can sometimes be combined to meet the wage and property limit.
- Separate service and non-service activities only where there is a genuine business reason and proper structure.
What Are the Risks and Limitations?
The QBI rules are complex and easy to misapply. Misclassifying a service business, overstating rental activity, or setting an S corp salary too low to boost QBI can all draw IRS scrutiny. The deduction also reduces income tax only, not self-employment tax. Planning should focus on legitimate business decisions rather than chasing the deduction alone.
What's the Bottom Line?
The QBI deduction lets eligible pass-through owners deduct up to 20% of qualified business income, and the One Big Beautiful Bill Act made it permanent. Below the inflation-adjusted threshold, most owners receive the full deduction; above it, wage, property, and service-business limits apply across a wider 2026 phase-in range. Careful planning of income, salary, and structure determines how much of the deduction an owner keeps.
Frequently Asked Questions
The qualified business income deduction under IRC Section 199A lets owners of pass-through businesses, such as sole proprietorships, partnerships, LLCs, and S corporations, deduct up to 20% of their qualified business income. It reduces federal income tax, not self-employment tax. The One Big Beautiful Bill Act made it permanent in 2025.
Yes. The deduction was scheduled to expire after 2025, but the One Big Beautiful Bill Act, signed July 4, 2025, made it permanent. Starting in 2026, the phase-in range for the income limits widens and a minimum deduction applies to qualifying active business owners.
Yes, on their share of the S corporation's qualified business income. The salary an owner receives from the S corporation is not QBI, so a higher salary lowers the deduction. Because salary also counts as W-2 wages for the wage limit, owners above the threshold need to balance the two.
C corporations are excluded entirely. Specified service trades or businesses, such as health, law, accounting, consulting, and financial services, lose the deduction once owner taxable income passes the threshold and phase-in range. Engineering and architecture are not treated as specified service businesses.
Most taxpayers claim it on IRS Form 8995. Taxpayers above the income threshold, or with more complex situations, use Form 8995-A. The deduction is taken on the individual return, after adjusted gross income, so it is available whether or not you itemize.