On this page
- What is the qualified business income deduction?
- What counts as qualified business income?
- Who qualifies for the full 20%?
- What happens when income is above the threshold?
- What changed for 2026?
- Does the deduction carry forward?
- How does entity choice affect the deduction?
- What records support the deduction?
- What's the next step?
- Frequently asked questions
- Related reading
The qualified business income deduction, also called the QBI deduction or Section 199A deduction, lets eligible owners of pass-through businesses deduct up to 20% of their qualified business income on their federal return. It applies to sole proprietors, partners, LLC members, and S-corp shareholders, and it was made permanent by 2025 legislation. Congress changed some of the rules starting in 2026.
Here's the short version of how it works, who gets the full benefit, and where it gets limited. At SBZ Tax, this is one of the deductions we see small business owners miss or misunderstand most often.
What is the qualified business income deduction?
It's a deduction for income earned through a business that isn't taxed at the entity level. Sole proprietorships, partnerships, LLCs taxed as either, and S corporations all "pass through" their profit to the owner's personal return. The QBI deduction reduces the taxable income on that return by up to 20% of the business's qualified profit.
It is taken below the line. It lowers your taxable income, not your adjusted gross income, and it does not reduce self-employment tax. You can claim it whether you itemize or take the standard deduction.
What counts as qualified business income?
Qualified business income is the net profit from a U.S. trade or business, after business deductions. For a sole proprietor, that's roughly the profit on Schedule C, adjusted for a few items such as the deductible part of self-employment tax, self-employed health insurance, and retirement plan contributions.
Several things are not QBI:
- W-2 wages you earn as an employee
- Capital gains and losses
- Most dividends and interest not tied to the business
- Guaranteed payments to a partner for services
- Reasonable compensation paid to an S-corp owner
That last point matters. S-corp owners get the deduction on their share of profit, not on the salary the company pays them. See our guide to S-corp reasonable salary for why that split matters.
Who qualifies for the full 20%?
Below a taxable-income threshold, most pass-through owners qualify for the deduction without the wage and business-type restrictions. For 2025, that threshold was $197,300 for single filers and $394,600 for married couples filing jointly. These figures are indexed for inflation, so check the current-year number before relying on it.
Below the threshold, the deduction is the smaller of two amounts:
- 20% of qualified business income, or
- 20% of your taxable income minus net capital gain
Filers in this range generally use the simpler Form 8995. Above it, Form 8995-A is required.
What happens when income is above the threshold?
Two limits phase in. Together they reduce the deduction for higher earners, and they can eliminate it.
The specified service trade or business (SSTB) limit. Fields such as health, law, accounting, consulting, financial services, and performing arts are SSTBs. Once taxable income passes the full phase-out range, an SSTB owner generally gets no deduction. Inside the phase-in range, the deduction is partially reduced.
The W-2 wage and property limit. For non-SSTB businesses above the threshold, the deduction is capped at the greater of:
- 50% of the W-2 wages the business pays, or
- 25% of those wages plus 2.5% of the unadjusted basis of qualified property (such as equipment and buildings)
A high-earning owner with no employees and little depreciable property can end up with a small or zero deduction. That's the part people miss when they assume the 20% is automatic.
What changed for 2026?
The deduction was set to expire after 2025, but 2025 tax legislation made it permanent. Beginning in 2026, the phase-in range for the wage and SSTB limits widens, which softens the cliff for higher earners. There is also a minimum deduction for taxpayers with a modest amount of active qualified business income. Check IRS guidance for the exact dollar amounts, since they're adjusted over time.
If you're searching for the qualified business income deduction for 2026, confirm every threshold against the current IRS instructions for Form 8995 and Form 8995-A.
Does the deduction carry forward?
Losses carry forward, but the deduction itself does not. If your qualified business income is negative for the year, there is no QBI deduction. The loss carries into the next year and reduces that year's qualified business income. It's tracked on the QBI forms and applied automatically against future positive income.
Keep your prior-year forms. A missing carryforward is an easy thing to lose track of when you change preparers or software.
How does entity choice affect the deduction?
Structure changes both the income that qualifies and the wages the business pays. An S corporation pays the owner a salary, which is not QBI, but that same salary counts as W-2 wages, which can raise the wage limit. A sole proprietor has no W-2 wages for themselves, so the limit may bite harder at high income.
This is why the QBI deduction comes up in S-corp vs. LLC comparisons, and why it's tied to the overall self-employment tax picture covered in our LLC self-employment tax guide. Many owners find the interaction worth modeling before choosing a structure, which is part of what tax planning is for.
Some professionals feel this directly. For example, physicians and other SSTB owners often hit the income limits, as covered in tax planning for physicians in Los Angeles.
What records support the deduction?
The deduction comes straight off your business profit, so clean books matter. Revenue and expenses need to be categorized correctly, and payroll records need to show W-2 wages if the wage limit applies. Good monthly bookkeeping makes it easier to get an accurate QBI figure at filing time. Be sure to account for deductions such as Section 179 and depreciation on Form 4562, since they change net profit.
What's the next step?
If you have pass-through income, pull last year's return and check whether a QBI deduction was claimed on Form 8995 or 8995-A. If you're unsure, or if your income is near the threshold, it's worth reviewing before you make estimated payments or entity decisions.
SBZ Tax works with small business owners and self-employed taxpayers nationwide, remotely or in person at our Palmdale, CA office at 190 Sierra Ct Ste 335. You can call 818-748-2020 or book a free consultation to go over your situation. See also S-corp and business tax services.
This article is general information, not tax advice for your specific situation. Talk to a qualified tax professional before making decisions.
Frequently asked questions
Can I take the qualified business income deduction if I take the standard deduction?
Yes. The QBI deduction is not an itemized deduction, so you can claim it with either the standard deduction or itemized deductions, as long as you have qualified business income and taxable income.
Does the QBI deduction reduce self-employment tax?
No. It lowers your income tax only. Self-employment tax is calculated on your net business earnings before the QBI deduction is applied.
Do rental properties qualify for the QBI deduction?
Sometimes. A rental activity must rise to the level of a trade or business, and the IRS provides a safe harbor with specific requirements for that. Rental income reported on Schedule E may qualify, but it depends on the facts.
Is the qualified business income deduction permanent?
Yes. It was scheduled to expire after 2025 but was made permanent by legislation enacted in 2025, with some rule changes beginning in 2026.
