The QBI deduction lets owners of sole proprietorships, partnerships, S corporations and most LLCs deduct up to 20% of their qualified business income from their federal taxable income. For the 2026 tax year, owners with taxable income up to $201,750 (single) or $403,500 (married filing jointly) can claim the full deduction without any wage or industry restrictions (IRS Rev. Proc. 2025-32, section 4.26).
A Worked Example: What the QBI Deduction Is Worth to a Plumbing Business
Consider James (an illustrative example), who runs a two-van plumbing business in Texas as a single-member LLC. His 2026 net profit is $110,000. He is single, has no other income and pays $6,000 a year for his own health insurance.
When James and his accountant sit down to plan his taxes, the QBI deduction turns out to be the largest deduction on his return:
- Net profit: $110,000
- Less the deductible half of self-employment tax: approximately $7,772
- Less self-employed health insurance: $6,000
- Qualified business income: $96,228
- Taxable income before the QBI deduction (after the 2026 standard deduction of $16,100): $80,128
- QBI deduction: the lower of 20% of QBI ($19,246) or 20% of taxable income ($16,026) = $16,026
At James’s 22% marginal rate, the deduction saves him about $3,526 in federal income tax. That is money he can put towards a third van, without spending a dollar more on the business.
The rest of this guide explains how to work out your own figure.
What Is the QBI Deduction?
The qualified business income deduction, also called the Section 199A deduction, lets eligible owners of pass-through businesses deduct up to 20% of their qualified business income. Income earned through a C corporation or as an employee does not qualify.
Why the QBI Tax Deduction Exists
The Tax Cuts and Jobs Act of 2017 cut the corporate tax rate to 21%. The QBI deduction gave comparable relief to businesses whose profits pass through to the owner’s personal return. In the top bracket, the deduction reduces the maximum effective rate on pass-through income to 29.6% instead of 37% (Warren Averett). The arithmetic is 37% × (100% − 20%) = 29.6%.
The QBI Deduction Is Now Permanent
The deduction was originally due to end on 31 December 2025. The One Big Beautiful Bill Act (OBBBA), signed on 4 July 2025, made the QBI deduction permanent, widened the phase-in ranges for 2026 and added a new $400 minimum deduction.
What Counts as Qualified Business Income
QBI is the net profit from a qualified US trade or business. It must be reduced by deductions linked to the business on your personal return. According to the IRS, these include:
- the deductible part of self-employment tax
- the self-employed health insurance deduction
- contributions to qualified retirement plans
The following do not count as QBI:
| Excluded item | Why it matters |
|---|---|
| W-2 wages | Employee income never qualifies |
| Reasonable compensation from your S corporation | Only profit after your salary counts |
| Guaranteed payments to partners | Treated like salary, not profit |
| Capital gains and losses | Investment income, not business income |
| Dividends and non-business interest | Investment income |
| Income from outside the US | Must be effectively connected to a US business |
Sources: IRS Instructions for Form 8995-A; IRS QBI overview.
Who Qualifies for the QBI Deduction?
| Business structure | Eligible? |
|---|---|
| Sole proprietorship (Schedule C) | Yes |
| Single-member LLC | Yes, unless it has elected C corporation tax status |
| Multi-member LLC taxed as a partnership | Yes |
| Partnership | Yes |
| S corporation | Yes, on profit above the owner’s salary |
| C corporation | No |
| W-2 employee | No |
Two points surprise business owners:
- You do not need to itemise. The deduction is available whether you itemise or take the standard deduction.
- It reduces income tax only. It does not reduce self-employment tax, the Net Investment Income Tax or the Additional Medicare Tax (National Tax Tools).
Does Rental Property Income Qualify?
Rental income qualifies only when the activity counts as a trade or business under Section 162. Rental property that doesn’t meet that test may still qualify under the IRS safe harbour in Revenue Procedure 2019-38 (IRS Instructions for Form 8995-A).
What Business Does Not Qualify for the QBI Deduction?
The IRS classifies certain professions as a specified service trade or business (SSTB). The main SSTB fields are listed below:
| SSTB field | Examples | Not included |
|---|---|---|
| Health | Physicians, dentists, nurses, pharmacists, vets, physiotherapists | Gyms, spas, medical device manufacturing |
| Law | Lawyers, paralegals, mediators | Printers, couriers, stenographers |
| Accounting | Accountants, enrolled agents, return preparers | — |
| Consulting | Professional advisers, lobbyists | Sales, training courses, consulting bundled into a non-SSTB business |
| Performing arts | Actors, musicians, directors | Equipment and venue operators |
| Athletics | Athletes, coaches, team managers | Facility maintenance, broadcasters |
| Also included | Actuarial science, financial and brokerage services, investment management, trading, and businesses built on the reputation or skill of their owners | — |
Being an SSTB does not automatically disqualify you. Your taxable income decides:
- At or below the threshold: SSTB owners receive the full 20% deduction, the same as every other business.
- Within the phase-in range: SSTB owners receive a reduced deduction.
- Above the phase-in range: SSTB owners receive nothing.
QBI Deduction 2025 vs 2026: Income Limits
| # | 2025 tax year | 2026 tax year |
|---|---|---|
| Threshold: single / head of household | $197,300 | $201,750 |
| Threshold: married filing jointly | $394,600 | $403,500 |
| Threshold: married filing separately | $197,300 | $201,775 |
| Phase-in range: single | $50,000 | $75,000 |
| Phase-in range: joint | $100,000 | $150,000 |
| Deduction fully limited above: single | $247,300 | $276,750 |
| Deduction fully limited above: joint | $494,600 | $553,500 |
| Minimum deduction | None | $400 (with at least $1,000 of QBI) |
Sources: 2025 figures from IRS Form 8995-A (2025); 2026 figures from IRS Rev. Proc. 2025-32.
QBI deduction 2025: use these figures for returns filed on extension
If you’re filing your 2025 return by the 15 October 2026 extension deadline, use the 2025 figures in the table above. The wider ranges and the $400 minimum apply only to tax years beginning after 31 December 2025.
What the OBBBA changed for 2026
- Permanence: You can now plan your entity structure, owner salary and equipment purchases without the deduction ending.
- Wider phase-in ranges: The range rises from $100,000 to $150,000 for joint filers and from $50,000 to $75,000 for other filers (Thomson Reuters). A wider range means the deduction reduces more gradually as your income rises.
- The $400 minimum: From 2026, owners with at least $1,000 of QBI from an active trade or business can claim at least $400, with both amounts indexed for inflation after 2026 (IRS Rev. Proc. 2025-32, section 2.12).
How to Calculate the QBI Deduction
Your taxable income places you in one of three zones.
| Zone | 2026 taxable income (single) | 2026 taxable income (joint) | Rule |
|---|---|---|---|
| 1 | Up to $201,750 | Up to $403,500 | 20% of QBI, capped at 20% of taxable income |
| 2 | $201,751 – $276,750 | $403,501 – $553,500 | Partial wage and property limit; SSTBs partially reduced |
| 3 | Above $276,750 | Above $553,500 | Full wage and property limit; SSTBs receive nothing |
Zone 1: below the threshold
Your deduction is the lower of:
- 20% of your QBI, or
- 20% of your taxable income minus net capital gain
This is the zone James falls into in the example above. The taxable income cap applied to him because his standard deduction reduced his taxable income below his QBI. Form 8995 applies the same “enter the smaller of” test.
Zone 2: within the phase-in range (SSTB example)
Priya is a single dentist who operates as an S corporation. In 2026:
- Taxable income before the QBI deduction: $239,250 ($37,500 above the $201,750 threshold)
- QBI: $220,000
- W-2 wages paid to staff: $150,000
Because she is $37,500 into a $75,000 range, 50% of her practice income still counts as QBI:
- 50% × $220,000 = $110,000 of QBI counted
- 20% × $110,000 = $22,000 deduction
Without the SSTB rule, her deduction would be $44,000. Her $150,000 of staff wages is high enough that the wage limit doesn’t reduce her deduction further. In this zone, one additional retirement contribution can shift the percentage in her favour.
Zone 3: above the phase-in range (non-SSTB example)
Above the range, a non-SSTB deduction is capped at the greater of:
- 50% of W-2 wages, or
- 25% of W-2 wages + 2.5% of the unadjusted basis of qualified property (UBIA)
(IRS QBI overview; National Tax Tools)
A married couple owns a construction S corporation with $700,000 of taxable income, $500,000 of QBI, $120,000 of W-2 wages and $200,000 of qualified equipment:
| Test | Amount |
|---|---|
| 20% of QBI | $100,000 |
| 50% of W-2 wages | $60,000 |
| 25% of wages + 2.5% of UBIA | $30,000 + $5,000 = $35,000 |
| Wage and property limit (greater of the two) | $60,000 |
| QBI deduction | $60,000 |
The wage limit costs this couple $40,000 of deductions.
Which form to use
- Form 8995: taxable income at or below the threshold (IRS)
- Form 8995-A: taxable income above the threshold, or when you have SSTB, aggregation or cooperative adjustments
The Kustoff QBI Deduction Increase: Will It Rise to 23%?
Rep. David Kustoff introduced the Small Business Tax Cut Act (H.R. 8415), which would raise the Section 199A deduction from 20% to 23% . The bill was introduced in the House on 21 April 2026 and referred to the Committee on Ways and Means.
The bill would also:
- Change the limit for owners above the threshold by introducing a “limitation phase-in amount” equal to 75% of taxable income above the threshold, which would increase the deduction for SSTB owners in that range
- Extend the deduction to certain business development company (BDC) interest dividends
- Update the inflation base year from 2018 to 2025
Status: H.R. 8415 is a proposal, not law. Plan your 2026 taxes using the current 20% rate.
What 23% would mean for you (MyIVA calculation)
The table below assumes income below the threshold and that the taxable income cap does not apply.
| QBI | Deduction at 20% | Deduction at 23% | Extra deduction | Extra tax saved at 24% |
|---|---|---|---|---|
| $50,000 | $10,000 | $11,500 | $1,500 | $360 |
| $100,000 | $20,000 | $23,000 | $3,000 | $720 |
| $150,000 | $30,000 | $34,500 | $4,500 | $1,080 |
| $200,000 | $40,000 | $46,000 | $6,000 | $1,440 |
6 Ways to Maximise Your QBI Deduction
- Keep business and personal finances separate. Mixed accounts and missing receipts distort your QBI. Monthly bookkeeping gives your tax preparer accurate figures, and catch-up bookkeeping fixes past months.
- Set a defensible S corporation salary. A higher salary lowers your QBI but raises the W-2 wages used in the Zone 3 limit. Test both figures before you set payroll. Our payroll team can model this for you.
- Manage taxable income near the threshold. Retirement contributions and the timing of equipment purchases can keep an SSTB owner in Zone 1.
- Consider aggregation. Owners of related businesses can elect to combine them on Schedule B of Form 8995-A, which pools wages and property (IRS Form 8995-A).
- Document rental activity. Keep separate books and time logs if you rely on the Rev. Proc. 2019-38 safe harbour.
- Plan before 31 December. Most QBI strategies must be in place before the year ends. Year-round tax planning makes this easier.
People Also Ask:
What is the QBI deduction in simple terms?
It is a federal income tax deduction of up to 20% of the profit from a pass-through business, such as a sole proprietorship, LLC, partnership or S corporation.
Is the QBI deduction permanent?
Yes. The One Big Beautiful Bill Act removed the 2025 end date, so the deduction continues in 2026 and later years.
Do I need to itemise to claim it?
No. You can take the standard deduction and still claim the QBI deduction.
Does the QBI deduction reduce self-employment tax?
No. It reduces federal income tax only.
Has the QBI deduction increased to 23%?
No. H.R. 8415 proposes 23%, but it has not become law. The rate is currently 20%.
Claim Every Dollar of Your QBI Deduction
The QBI deduction saved James $3,526 and Priya $22,000 of taxable income, and it left the construction couple $40,000 short of the full deduction because of their payroll structure. The difference comes from accurate books and planning before year-end.
MyIVA Accounting prepares tax-ready books and plans QBI strategy for small businesses across the USA. Book a free 30-minute QBI review before 31 December to find out what your deduction is worth.
This article is general information, not tax advice. Consult a qualified tax professional about your circumstances.
