The QBI deduction saves business owners up to 20% on their federal taxes. And as of July 2025, it’s permanent.
Most guides still reference the 2025 “sunset” that no longer exists. This one covers what actually matters for 2026: the new $400 minimum deduction, expanded phase-out ranges, and how to calculate what you’ll save.
Key Takeaways
- The QBI deduction lets eligible business owners deduct up to 20% of qualified business income from pass-through entities
- NEW for 2026: The OBBBA (signed July 2025) made Section 199A permanent. No more sunset.
- NEW for 2026: A $400 minimum deduction now applies if your QBI exceeds $1,000
- NEW for 2026: Phase-out ranges expanded to $200K-$275K (single) and $400K-$550K (MFJ)
- Income from C corporations or W-2 employment does not qualify
- SSTBs (service businesses like law, medicine, consulting) face special limitations above thresholds
- Rental properties may qualify through the safe harbor or Section 162 trade/business tests
Table of Contents
What is the QBI Deduction?
The Qualified Business Income deduction is a 20% tax break for owners of pass-through businesses. Congress created it through the Tax Cuts and Jobs Act of 2017, and it remains one of the most valuable deductions available to small business owners today.
Here’s the simple version: If you own a sole proprietorship, partnership, S corporation, or certain trusts and estates, you may be able to deduct 20% of your business profits before calculating your federal income tax.
The deduction actually has two components:
- QBI Component: 20% of qualified business income from domestic businesses
- REIT/PTP Component: 20% of qualified real estate investment trust dividends and publicly traded partnership income
One detail that surprises many business owners: You can claim this deduction whether you itemize or take the standard deduction. It shows up on Line 13 of your Form 1040 as a separate below-the-line deduction.
The big news for 2026: Section 199A was originally set to expire after December 31, 2025. That’s no longer the case. The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, made the QBI deduction permanent.
For a deeper look at how business structure affects your taxes, see our Business Entity Tax Guide.
Major 2026 Changes: The QBI Deduction Is Now Permanent
If you’ve been reading older tax guides that mention a “2025 sunset” or “expiration,” that information is now outdated. The One Big Beautiful Bill Act changed everything.
What the OBBBA Changed
Three major modifications took effect:
1. Permanence. The deduction no longer expires. Business owners can now plan compensation structures, entity elections, and ownership transitions knowing the 20% deduction will remain available indefinitely.
2. Expanded Phase-Out Ranges. The income ranges where the deduction phases out have been widened significantly. This means more taxpayers at higher income levels can claim partial deductions.
3. New $400 Minimum Deduction. Starting in 2026, if your QBI is at least $1,000 and you materially participate in the business, you’re guaranteed a minimum $400 deduction. Even if standard calculations would produce less.
2025 vs 2026 Threshold Comparison
| Feature | 2025 (Pre-OBBBA) | 2026+ (Post-OBBBA) |
|---|---|---|
| Status | Was expiring after 2025 | Permanent |
| Deduction Rate | 20% | 20% (unchanged) |
| Single Phase-Out Starts | $197,300 | ~$200,000 |
| Single Phase-Out Ends | $247,300 | ~$275,000 |
| MFJ Phase-Out Starts | $394,600 | ~$400,000 |
| MFJ Phase-Out Ends | $494,600 | ~$550,000 |
| Minimum Deduction | None | $400 |
The New $400 Minimum Deduction
This provision benefits smaller businesses and those in phase-out territory. The requirements:
- Your QBI must be at least $1,000
- You must materially participate in one or more qualified trades or businesses
- Result: You get at least $400, even if the standard 20% calculation produces less
Both the $1,000 threshold and $400 minimum will be adjusted for inflation starting in 2027.
What This Means for Your Planning
The permanence changes the game. Previously, business owners hesitated to make long-term structural decisions because the deduction might disappear. Now you can confidently:
- Make S-corp elections knowing QBI benefits continue
- Structure ownership transitions around the deduction
- Coordinate retirement contributions with QBI planning
- Develop multi-year income timing strategies
Who Qualifies for the QBI Deduction?
Not every business owner qualifies. Understanding eligibility is step one.
Eligible Business Structures
You may qualify if you receive income from:
- Sole proprietorships (reported on Schedule C)
- Partnerships (income flows through on Schedule K-1)
- S corporations (income flows through on Schedule K-1)
- Single-member LLCs (treated as sole proprietorship or S-corp)
- Certain trusts and estates with qualifying business income
The common thread: These are all “pass-through” entities. Business income flows to your personal return rather than being taxed at the entity level.
Who Does NOT Qualify
The QBI deduction is not available for:
- C corporation income. C corps pay tax at the entity level. Shareholders don’t get QBI on dividends.
- W-2 wages. Income earned as an employee (including S-corp owner wages) doesn’t qualify.
- Foreign business income. Only domestic business income qualifies.
- Investment income. Capital gains, dividends, and interest generally don’t qualify.
Choosing the right entity structure matters. Our LLC vs S-Corp Complete Comparison breaks down the tax implications of each.
What Counts as Qualified Business Income?
This is where the details matter. Not all income from your business qualifies.
Qualified Business Income (QBI): The net amount of qualified items of income, gain, deduction, and loss from any qualified trade or business operated within the United States.
What IS Included
- Ordinary business income from qualified trades or businesses
- Section 1231 gains and losses (in most cases)
- Self-rental income from properties rented to your own business
- Income from businesses conducted domestically
What is NOT Included
- Capital gains and losses. Investment income.
- Dividends. Investment income, not business income.
- Interest income not properly allocable to a trade or business
- S-corporation reasonable compensation. Your W-2 wages from your S-corp? Excluded.
- Guaranteed payments to partners. Also excluded from QBI.
- Foreign business income. Must be domestic.
The distinction hits S-corporation owners hardest. Your reasonable salary gets excluded from QBI, which creates a planning tension between salary and distributions. More on that in our S-Corp Reasonable Compensation Guide.
2025 and 2026 Income Thresholds
Your total taxable income determines whether you claim the full deduction or face limitations. Not just business income. Everything.
2025 Thresholds
| Filing Status | Full Deduction Below | Phase-Out Range | Deduction Eliminated Above |
|---|---|---|---|
| Single / Head of Household | $197,300 | $197,300 – $247,300 | $247,300 |
| Married Filing Jointly | $394,600 | $394,600 – $494,600 | $494,600 |
| Married Filing Separately | $197,300 | $197,300 – $247,300 | $247,300 |
2026 Thresholds (Post-OBBBA)
| Filing Status | Full Deduction Below | Phase-Out Range | Deduction Eliminated Above |
|---|---|---|---|
| Single / Head of Household | ~$200,000 | $200,000 – $275,000 | $275,000 |
| Married Filing Jointly | ~$400,000 | $400,000 – $550,000 | $550,000 |
| Married Filing Separately | ~$200,000 | $200,000 – $275,000 | $275,000 |
Notice the phase-out ranges expanded from $50,000/$100,000 to $75,000/$150,000. This means more taxpayers in the phase-out zone can claim larger partial deductions than before.
All thresholds will be indexed for inflation in future years.
How to Calculate Your QBI Deduction
The calculation depends on whether your income falls below or above the threshold.
The Simplified Calculation (Income Below Threshold)
If your taxable income is below the threshold ($200,000 single / $400,000 MFJ in 2026), use this approach:
- Determine your QBI from each qualified business
- Calculate 20% of your total QBI
- Calculate 20% of your taxable income minus net capital gains and qualified dividends
- Your deduction is the lesser of Step 2 or Step 3
- Compare to the $400 minimum (2026+). Take the greater amount if you qualify.
The Complex Calculation (Income Above Threshold)
Above the threshold, additional limitations apply:
- SSTB limitations may reduce or eliminate your deduction
- W-2 wage limitations cap the deduction based on wages paid
- UBIA limitations provide an alternative calculation using property basis
These limitations phase in across the phase-out range. At the top of the range, they apply fully.
QBI Deduction Calculation Example
Scenario: Sarah is a marketing consultant with:
- $150,000 QBI from her consulting business
- $160,000 total taxable income (below the 2026 threshold)
- No SSTB issues (she consults for manufacturing companies, not financial services)
Calculation:
- 20% of QBI: $150,000 × 20% = $30,000
- 20% of taxable income: $160,000 × 20% = $32,000
- QBI deduction: Lesser of $30,000 or $32,000 = $30,000
Sarah deducts $30,000, dropping her taxable income from $160,000 to $130,000. At the 24% marginal rate, this saves her $7,200 in federal taxes.
Specified Service Trades or Businesses (SSTBs)
If you run a service-based business, you may face additional restrictions at higher income levels.
What is an SSTB?
A Specified Service Trade or Business is one where the principal asset is the reputation or skill of employees or owners. According to IRS guidance, Congress wanted to prevent high-earning professionals from restructuring solely to claim the 20% deduction.
Complete List of SSTB Categories
Your business is an SSTB if it involves services in:
- Health: Physicians, dentists, nurses, physical therapists, psychologists
- Law: Attorneys, paralegals, legal services
- Accounting: CPAs, enrolled agents, bookkeepers, tax preparers
- Actuarial science: Actuaries, risk assessment
- Performing arts: Actors, musicians, entertainers
- Consulting: Advice and counsel on business matters
- Athletics: Professional athletes, coaches, team owners
- Financial services: Financial advisors, investment managers
- Brokerage services: Real estate and insurance brokers
- Investing and investment management: Hedge funds, private equity
- Trading: Securities and commodities trading
- Any business where reputation or skill is the principal asset
SSTB Exceptions: Architects and Engineers
Here’s the good news if you’re in these fields: Architects and engineers are explicitly excluded from SSTB classification. Your firm is treated like any other qualified trade or business, without SSTB limitations. Even at high income levels.
SSTB Phase-Out Rules
- Below the threshold: Your SSTB is treated like any other business. Full 20% deduction available.
- Within the phase-out range: You get a partial deduction. The limitation phases in as income increases.
- Above the phase-out range: No QBI deduction allowed for SSTB income.
De Minimis Rules for Mixed Businesses
If your business has both SSTB and non-SSTB activities:
- Gross receipts ≤ $25 million: If less than 10% comes from SSTB activities, the entire business is NOT treated as an SSTB
- Gross receipts > $25 million: If less than 5% comes from SSTB activities, the entire business is NOT treated as an SSTB
W-2 Wage and UBIA Limitations Explained
For taxpayers above the income threshold, the QBI deduction may be capped based on wages paid and property held.
When Do These Limitations Apply?
The W-2 wage and UBIA limitations:
- Do not apply if taxable income is below the threshold
- Phase in as income passes through the phase-out range
- Fully apply once income exceeds the upper threshold
The Two-Part Limitation Test
Your QBI deduction for each business cannot exceed the greater of:
Option A: 50% of W-2 wages paid by the qualified trade or business
OR
Option B: 25% of W-2 wages plus 2.5% of UBIA of qualified property
You calculate both and use whichever produces the larger amount.
UBIA (Unadjusted Basis Immediately After Acquisition): The original cost of tangible, depreciable property when placed in service. This includes buildings, equipment, and vehicles. Land does not count. The property must still be held at year-end and within its depreciable period.
Which Test Benefits Your Business?
The 50% W-2 wage test benefits businesses with:
- Significant payroll (including S-corp owner wages)
- Service businesses with employees
- Relatively few depreciable assets
The 25% wages + 2.5% UBIA test benefits businesses with:
- Substantial real estate holdings
- Heavy equipment or machinery
- Manufacturing facilities
- Lower relative wage expenses
Calculation Example
Scenario: A construction company with:
- $500,000 QBI
- $200,000 in W-2 wages
- $1,000,000 UBIA (equipment and vehicles)
- Owner’s taxable income above the threshold
Calculation:
- Option A: 50% of W-2 wages = $200,000 × 50% = $100,000
- Option B: 25% wages + 2.5% UBIA = $50,000 + $25,000 = $75,000
The greater amount is $100,000, so the limitation doesn’t reduce the deduction in this case (20% of $500,000 QBI = $100,000).
QBI for Rental Properties
One of the most common questions: Does rental income qualify? The answer is it depends.
When Rental Income Qualifies as QBI
Rental real estate income can qualify if:
- The rental activity rises to the level of a trade or business under Section 162, OR
- The rental activity meets the IRS safe harbor requirements
The IRS Safe Harbor (Revenue Procedure 2019-38)
The IRS finalized a safe harbor that, if met, automatically treats your rental as a qualified trade or business.
Safe Harbor Requirements:
- Separate books and records maintained for each rental real estate enterprise
- 250+ hours of rental services performed per year (for rentals less than 4 years old) OR 250+ hours in at least 3 of the past 5 years (for older rentals)
- Contemporaneous time records documenting hours and services
- Signed statement attached to your return certifying safe harbor requirements are met
Qualifying rental services include:
- Advertising and tenant screening
- Negotiating and executing leases
- Rent collection and tenant communications
- Property repairs and maintenance
- Managing contractors and service providers
What Doesn’t Qualify for Safe Harbor
- Triple net lease properties. Tenants pay taxes, insurance, and maintenance.
- Property used personally for any part of the tax year by the owner.
Important: Failing the safe harbor doesn’t automatically disqualify your rental. You may still qualify under the general Section 162 trade or business test.
For guidance on proper record-keeping, see our Bookkeeping for S-Corporations guide.
QBI for S-Corporation Owners
S-corporation owners face unique considerations when it comes to QBI.
How S-Corp Income Qualifies for QBI
When you own an S-corporation, your share of business profits flows through on Schedule K-1. This K-1 income does qualify as QBI (assuming it’s from a qualified trade or business).
But your reasonable compensation (the W-2 salary the S-corp pays you) is excluded from QBI.
The Reasonable Compensation Trade-Off
This creates a planning tension:
- Higher salary = More W-2 wages for the wage limitation test, but lower QBI base
- Lower salary = Higher QBI base, but potentially fails wage limitation test at high incomes
- Too low salary = IRS audit risk for unreasonable compensation
Optimizing Salary vs. Distributions
For many S-corp owners, the “sweet spot” falls around:
- 35-40% of net income as salary
- 60-65% as distributions
But this is a guideline, not a rule. Your actual reasonable compensation must reflect:
- Industry standards for your role
- Your qualifications and experience
- Time devoted to the business
- What you’d pay a non-owner employee for similar work
Never set your salary based solely on QBI optimization. The IRS requires reasonable compensation and will reclassify distributions as wages if your salary appears artificially low.
For detailed guidance, see:
QBI Loss Carryover Rules
What happens if your qualified trade or business has a loss instead of income?
How QBI Losses Work
- Negative QBI from one business offsets positive QBI from your other businesses in the same year
- If you have net negative QBI across all businesses, the loss carries forward
- The carryforward is called a Qualified Business Loss (QBL)
- In future years, the QBL reduces your QBI before calculating the 20% deduction
Example
Year 1: Business A has $50,000 QBI; Business B has ($80,000) loss
- Net QBI: ($30,000). No QBI deduction, but $30,000 QBL carries forward.
Year 2: Business A has $100,000 QBI; Business B has $20,000 QBI
- Gross QBI: $120,000
- Less QBL carryforward: ($30,000)
- Net QBI: $90,000
- QBI Deduction: $90,000 × 20% = $18,000
Business Closure and Carryovers
If a business closes while you still have QBI loss carryforward, the rules get complex. The carryforward doesn’t necessarily disappear. Work with a tax professional on your specific situation.
How to Claim the QBI Deduction (Forms 8995 & 8995-A)
Claiming the deduction requires completing either Form 8995 or Form 8995-A.
Form 8995 (Simplified)
Use Form 8995 if:
- Taxable income is at or below the threshold
- No SSTB limitations to calculate
- No business aggregation needed
- Straightforward situation
Form 8995 is a single-page form with a simplified calculation.
Form 8995-A (Full Calculation)
Use Form 8995-A if:
- Taxable income is above the threshold
- SSTB income requiring phase-out calculations
- W-2 wage or UBIA limitations apply
- Aggregating multiple businesses
- QBI loss carryforwards
Form 8995-A includes multiple schedules for different scenarios.
Where It Goes on Your 1040
The QBI deduction is reported on Line 13 of Form 1040. It’s a “below-the-line” deduction. This means it reduces taxable income but not adjusted gross income (AGI).
For help understanding your Schedule K-1, we break down each box and what it means for your return.
Tax Planning Strategies to Maximize QBI
With the QBI deduction now permanent, long-term planning becomes even more valuable.
Income Timing Strategies
If your income hovers near the threshold:
- Accelerate deductions into high-income years to stay below the threshold
- Defer income when practical (cash-basis businesses have flexibility here)
- Time major equipment purchases to maximize depreciation deductions
Entity Structure Optimization
The right structure can significantly impact your QBI deduction:
- Sole proprietors with high self-employment income may benefit from S-corp election
- S-corp owners should balance salary vs. distributions carefully
- Rental property owners should evaluate safe harbor qualification
Aggregation Election Benefits
If you own multiple businesses, aggregating them for QBI purposes can help:
- Combine W-2 wages across businesses for the wage limitation test
- Offset losses from one business against income from others
- Potentially exceed limitations that would apply to businesses individually
Aggregation requires meeting specific IRS criteria and making a formal election.
Retirement Plan Contributions
Maximizing retirement contributions reduces taxable income, which can:
- Keep you below QBI income thresholds
- Reduce phase-out limitations if you’re in the phase-out range
- Provide additional tax-deferred savings beyond the QBI benefit
Options include SEP-IRAs (up to $69,000 in 2024), Solo 401(k)s, and SIMPLE IRAs.
Check your key dates with our Federal Income Tax Deadlines calendar.
Frequently Asked Questions
What is the QBI deduction?
The QBI deduction (Section 199A) allows eligible self-employed individuals and small business owners to deduct up to 20% of their qualified business income from pass-through entities like sole proprietorships, partnerships, and S corporations.
Did the QBI deduction expire in 2025?
No. The One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, made the QBI deduction permanent. There is no longer an expiration date.
What are the QBI income limits for 2026?
For 2026, the full deduction is available below ~$200,000 (single) or ~$400,000 (MFJ). Phase-outs extend to $275,000 (single) and $550,000 (MFJ).
What is the new $400 minimum QBI deduction?
Starting in 2026, if your QBI is at least $1,000 and you materially participate, you’re guaranteed a minimum $400 deduction. Even if standard calculations would produce less.
Does my rental property qualify for the QBI deduction?
Potentially yes. Rental income can qualify through the IRS safe harbor (250+ hours of services annually, contemporaneous records) or by meeting the Section 162 trade/business test.
What is an SSTB and why does it matter?
A Specified Service Trade or Business includes fields like law, medicine, accounting, consulting, and financial services. SSTB owners above income thresholds face reduced or eliminated QBI deductions.
How do I calculate my QBI deduction?
Below income thresholds: 20% of QBI or 20% of taxable income (minus capital gains), whichever is less. Above thresholds: additional W-2 wage and UBIA limitations apply.
Do S-corp owners get the QBI deduction?
Yes. S-corp K-1 income qualifies as QBI. However, reasonable compensation (W-2 salary) does NOT count as QBI.
Can I claim QBI if I take the standard deduction?
Yes. The QBI deduction is available regardless of whether you itemize or take the standard deduction.
What form do I use to claim the QBI deduction?
Use Form 8995 for simplified calculations (income below threshold) or Form 8995-A for complex situations (income above threshold, SSTBs, aggregation).
Making the Most of Your QBI Deduction
The QBI deduction remains one of the most valuable tax benefits for small business owners. A 20% reduction in taxable business income adds up fast. For a business owner with $200,000 in QBI, that’s $40,000 off your taxable income. At the 32% bracket, you’re looking at nearly $13,000 in federal tax savings.
Now that Section 199A is permanent, the planning horizon has expanded. You can make entity structure decisions, compensation strategies, and retirement contribution plans knowing the deduction will still be there in five, ten, or twenty years.
The 2026 changes make it even better: wider phase-out ranges mean more taxpayers at higher income levels can benefit. And the new $400 minimum ensures even smaller businesses get something.
But these rules have complexity. The interplay between reasonable compensation, wage limitations, SSTB classifications, and rental safe harbors can be tricky to navigate without professional guidance.
If you’re leaving deductions on the table or unsure whether your current structure maximizes QBI, it’s worth a conversation. Our team specializes in S-corp tax optimization and pass-through entity planning. Schedule a consultation with SDO CPA to make sure you’re capturing every dollar of QBI deduction available to you.