The QBI Deduction (Section 199A), Explained for Business Owners

The qualified business income deduction is the largest tax break most pass-through owners get, and the one they understand least. It shows up as a single line near the bottom of the 1040, it is computed on a form most people never open, and for years it carried an expiration date that made planning around it feel pointless. That date is gone. The One Big Beautiful Bill Act made the deduction permanent, so it is now worth understanding how it actually works and what moves it.

The short version: if your business profit flows through to your personal return, up to 20% of it can be deducted before income tax is computed. The long version has thresholds, a list of "specified service" businesses that lose the deduction at higher incomes, and a wage test that punishes profitable businesses with no employees. Here is the full picture, with the 2026 numbers.

What the deduction is, and what counts as qualified business income

Section 199A lets an individual deduct 20% of qualified business income (QBI) from a sole proprietorship, partnership, LLC or S-corporation. It is a deduction from taxable income, not from adjusted gross income, and you get it whether you itemize or take the standard deduction. It does not reduce self-employment tax; the IRS is explicit that it does not reduce net earnings from self-employment.

QBI is the net income from a U.S. trade or business, after the deductions attributable to it. That includes the deductible half of self-employment tax, self-employed health insurance, and retirement contributions made through the business, all of which reduce QBI. It excludes W-2 wages you receive (including reasonable compensation from your own S-corp), guaranteed payments from a partnership, capital gains and losses, dividends, and interest income not tied to the business. A landlord may or may not have a "trade or business" for this purpose; that is a separate question we take up case by case.

There is also an overall ceiling: the deduction cannot exceed 20% of your taxable income minus net capital gain. If the business is your only income and you take the standard deduction, that ceiling usually binds, and the deduction is 20% of taxable income rather than 20% of QBI.

What OBBBA changed

The One Big Beautiful Bill Act, signed July 4, 2025, made four changes to Section 199A, all effective for tax years beginning after December 31, 2025:

• The deduction is permanent. The scheduled expiration after 2025 was removed from the statute.
• The 20% rate stays. An earlier House version would have raised it to 23%; the final law kept 20%.
• The phase-in range above the income threshold widened from $50,000 to $75,000 for single filers and from $100,000 to $150,000 for joint filers. That range is where the wage test and the specified-service limits are phased in, so a wider range means a gentler slope.
• A new minimum deduction of $400 for anyone with at least $1,000 of QBI from businesses in which they materially participate (the same standard as the passive-activity rules). Both figures are indexed for inflation after 2026.

Nothing else moved. The list of specified service businesses, the W-2 wage and property tests, and the taxable-income ceiling all work as they did before.

The 2026 thresholds

The threshold amounts are indexed each year and set in Rev. Proc. 2025-32 for 2026. They are measured against taxable income before the QBI deduction, not against business profit or AGI.

Below the threshold, the deduction is simply 20% of QBI (subject to the taxable-income ceiling) and it does not matter what kind of business you run or whether you pay wages. Inside the range, the limits phase in proportionally. Above the top of the range, the limits apply in full.

Specified service trades or businesses (SSTBs)

Certain service businesses lose the deduction entirely once taxable income passes the top of the phase-in range. The regulations list the fields: health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage, investing and investment management, trading, dealing in securities or commodities, and any business whose principal asset is the reputation or skill of its owners or employees. That last category is narrower than it sounds; the final regulations limit it to endorsement income, licensing of a name or likeness, and appearance fees.

What is not an SSTB matters as much: architecture and engineering are excluded by statute, and contractors, manufacturers, retailers, restaurants, e-commerce sellers, real estate agents, and most trades are not on the list. A business under $25 million of gross receipts with less than 10% of receipts from SSTB activity is not treated as an SSTB at all (the cutoff is 5% above $25 million). A dentist, a physical therapist, a CPA or a management consultant in Tampa with joint taxable income of $560,000 gets no deduction in 2026. The same income earned by an HVAC contractor gets the full analysis below.

The W-2 wage and UBIA limits

Above the threshold, a non-SSTB owner's deduction for each business is limited to the greater of 50% of the W-2 wages the business paid, or 25% of those wages plus 2.5% of the unadjusted basis immediately after acquisition (UBIA) of the business's depreciable property. The second test exists for capital-heavy businesses with few employees, like a self-storage facility or a rental portfolio.

This is where the S-corp salary decision reappears. Your own W-2 salary is not QBI, so it shrinks the base. But it also counts as W-2 wages paid by the business, so above the threshold it can rescue a deduction that would otherwise be zero. A profitable solo S-corp with a low salary and no other employees is the classic case that gets squeezed: high taxable income, little QBI-eligible wages, and a deduction capped at half the owner's own salary. We cover how to set the salary in S-corp reasonable salary: how much should you pay yourself?

Worked examples

Below the threshold. A single management consultant in St. Petersburg nets $150,000 on Schedule C. Self-employment tax is $21,194, half of which ($10,597) is deductible, so QBI is $139,403 and 20% of it is $27,881. But her taxable income before the deduction is $139,403 less the $16,100 standard deduction, or $123,303, and 20% of that is $24,661. The ceiling wins: her deduction is $24,661, which saves her about $5,800 of federal income tax. Consulting is an SSTB, but at $123,303 of taxable income that is irrelevant.

Above the threshold, non-SSTB. A married couple own an HVAC company taxed as an S-corp. Their K-1 shows $500,000 of QBI; the company paid $300,000 of W-2 wages during the year, including the owner's $120,000 salary, and holds $200,000 of UBIA in trucks and equipment. Their joint taxable income is $600,000, above the $553,500 top of the range, so the wage test applies in full. Twenty percent of QBI is $100,000. The wage limit is the greater of $150,000 (50% of wages) or $80,000 (25% of wages plus 2.5% of UBIA), so $150,000. The overall ceiling is 20% of $600,000, or $120,000. The deduction is the smallest of the three: $100,000, worth roughly $35,000 at their 35% marginal rate.

Same business, fewer employees. If that company had used subcontractors and the only W-2 wages were the owner's $120,000 salary, the wage limit would be $60,000 (50% of $120,000; the UBIA route gives only $35,000). The deduction drops from $100,000 to $60,000, costing about $14,000 of tax. That is the point at which a higher owner salary, or converting long-term subcontractors to employees, can pay for itself through this deduction alone.

Inside the phase-in range, SSTB. A dentist and her spouse have joint taxable income of $478,500, exactly halfway through the 2026 range. The practice generates $300,000 of QBI and pays $250,000 of W-2 wages. Because she is halfway through the range, only 50% of her QBI and wages count: $150,000 of QBI and $125,000 of wages. Twenty percent of $150,000 is $30,000, well under the $62,500 wage limit, so her deduction is $30,000. A non-SSTB business with identical numbers would deduct $60,000. Under the old $100,000 range she would have been 75% of the way through and deducted only $15,000, so the wider range is worth $15,000 of deduction to her in 2026.

The new minimum. A W-2 employee runs a weekend photography business that nets $1,500 after expenses. Twenty percent is about $300, but because she materially participates and has more than $1,000 of QBI, the 2026 floor gives her $400.

What usually goes wrong

The errors we correct most often are mechanical. Retirement contributions and self-employed health insurance are deducted on the 1040 but not subtracted from QBI, overstating the deduction. Rental income is treated as QBI with no analysis of whether the activity is a trade or business. An owner with taxable income in the phase-in range is told "you're over the limit, no deduction," when the real answer is a partial one. And S-corp salaries are set to minimize payroll tax with no one checking whether the resulting W-2 wages will support the deduction at the owner's income level.

The planning error is bigger than any of these: treating the deduction as something that happens at filing time. Whether you land under $403,500 of joint taxable income can turn on a retirement contribution, the timing of equipment purchases under Section 179 or bonus depreciation, or a December salary adjustment, all of which have to be decided before December 31. Our year-end tax planning guide walks through those levers.

When to get help

If your household taxable income is anywhere near the thresholds, or your business is on the SSTB list, the deduction is worth a proper projection in the fall, when there is still time to move it. We model it alongside S-corp salary, retirement contributions and depreciation elections as part of our business tax planning and preparation service, then prepare the return so the numbers match the plan.

If you have been filing without a QBI computation, or you are not sure whether your rental or consulting income qualifies, request a 20-minute fit call and bring your last return. The deduction can also be claimed on an amended return while the refund window is open, so a missed year is often recoverable. For the bigger picture on structure, start with LLC vs. S-corp: how the taxes actually differ.

Jenny Gao, CPA, EA

Founder of Balance Partners. Florida-licensed CPA and IRS Enrolled Agent with more than a decade of accounting and tax experience. Jenny writes and reviews every guide on this site. About Jenny

This article is general educational information for U.S. business owners and is not accounting, tax, legal, payroll or financial advice for your situation. Rules change and vary by entity, state and facts. Balance Partners, LLC does not provide audit, review or other attest services. Last reviewed September 14, 2026.