What the deduction is
Section 199A allows owners of sole proprietorships, partnerships, S corporations and some trusts and estates to deduct up to 20 percent of their qualified business income (QBI), plus 20 percent of qualified real estate investment trust dividends and publicly traded partnership income. The IRS caps the total at 20 percent of taxable income minus net capital gain. It is not an itemized deduction, so it comes on top of the standard deduction, and it reduces taxable income rather than adjusted gross income; it does nothing to self-employment tax, which the self-employment tax calculator works out separately. Wages from a job and income from a C corporation do not qualify.
What counts as QBI
| Qualified business income | Not QBI |
|---|---|
| Net profit of a sole proprietorship (Schedule C) or farm | W-2 wages from employment |
| Your share of a partnership's or S corporation's ordinary business income | Reasonable compensation your S corporation pays you |
| Net rental income that rises to a trade or business | Guaranteed payments from a partnership |
| Capital gains and losses, interest income, certain dividends | |
| Income from a C corporation |
The 2026 thresholds
| Filing status | Threshold (taxable income) | Top of phase-in range |
|---|---|---|
| Married filing jointly | $403,500 | $553,500 |
| Married filing separately | $201,775 | $276,775 |
| All other returns | $201,750 | $276,750 |
The thresholds are taxable income, after the standard or itemized deduction, not business profit. At or below the threshold none of the limits below apply: a consultant, a dentist or a plumber all get the straight 20 percent. The range above it is $75,000 wide for single filers and $150,000 for joint filers in 2026, double the earlier width, which the Congressional Research Service lists among the 2025 law's changes.
Above the threshold
- The W-2 wage and property limit. Per the Form 8995-A instructions, the QBI component of each business is limited to the greater of 50 percent of the W-2 wages the business paid, or 25 percent of W-2 wages plus 2.5 percent of the unadjusted basis of its qualified property. A business with no employees and no depreciable property therefore loses the deduction above the range; one with payroll keeps some or all of it.
- Specified service trades or businesses. Health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage, investing, trading, dealing in securities or commodities, and any business whose principal asset is the reputation or skill of its owners or employees. Within the phase-in range only an applicable percentage of an SSTB is treated as a qualified business; above the range an SSTB gets no deduction at all.
- Phase-in. Between the threshold and the top of the range both reductions apply proportionally, so the deduction tapers rather than stopping at a cliff.
One sole proprietor
A single freelancer has $80,000 of qualified business income after the adjustments Form 8995 requires, and $60,000 of taxable income after the standard deduction and the deductible half of self-employment tax, with no capital gains. Taxable income is far below the $201,750 threshold, so the limits do not apply:
| Step | Amount |
|---|---|
| 20% of QBI | $16,000 |
| 20% of taxable income minus net capital gain | $12,000 |
| QBI deduction (the lesser) | $12,000 |
| Taxable income after the deduction | $48,000 |
| Federal tax saved at 12% | $1,440 |
The taxable income limit is what binds here: with modest other income and the standard deduction, taxable income is lower than business profit, and 20 percent of the smaller figure wins. That is common for sole proprietors, and it is why the deduction is often less than the headline 20 percent of profit. The guide sole proprietorship vs LLC explains why the legal form does not change this, since a single-member LLC files the same Schedule C, and estimated quarterly taxes 2026 covers paying the tax on what is left.
Forms and the 2026 changes
- Form 8995 is the short computation for taxpayers below the threshold; Form 8995-A handles the limits above it.
- Permanent. The deduction was scheduled to expire after 2025; the Congressional Research Service describes the 2025 law as extending and enhancing it without an end date.
- Minimum deduction. For tax years after 2025, taxpayers with at least $1,000 of qualified business income from an active business get a deduction of at least $400, per the CRS summary and the IRS page's reference to the minimum deduction for active QBI.
This guide follows the IRS pages, the Form 8995-A instructions and Rev. Proc. 2025-32. Rental real estate, multiple businesses and aggregation, and trusts have rules of their own in the instructions.
Frequently asked questions
What is the QBI deduction?
The qualified business income deduction under section 199A: a deduction of up to 20 percent of the qualified business income from a sole proprietorship, partnership, S corporation or some trusts and estates, plus 20 percent of qualified REIT dividends and publicly traded partnership income. It is limited to 20 percent of taxable income minus net capital gain, and above an income threshold it is further limited by the business's W-2 wages and property. Income from a C corporation and wages from employment do not qualify.
What are the QBI thresholds for 2026?
Rev. Proc. 2025-32 sets the 2026 threshold at $403,500 of taxable income for married filing jointly, $201,775 married filing separately and $201,750 for all other returns, with the phase-in range running to $553,500, $276,775 and $276,750. Below the threshold the W-2 wage, property and specified service limits do not apply; inside the range they phase in; above it they apply in full.
What is a specified service trade or business?
Per the Form 8995-A instructions, a trade or business providing services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage, investing, trading, or dealing in securities or commodities, or any business whose principal asset is the reputation or skill of its owners or employees. Below the threshold an SSTB gets the full deduction; within the phase-in range only an applicable percentage of it counts; above the range it gets none.
What counts as qualified business income?
The net amount of qualified items of income, gain, deduction and loss from a qualified US trade or business. The IRS excludes capital gains and losses, certain dividends, interest income, W-2 wages, reasonable compensation paid to you by your S corporation and guaranteed payments from a partnership. The deduction reduces taxable income, not adjusted gross income, and does not reduce self-employment tax.
What changed for 2026?
The Congressional Research Service summary of the 2025 law says the deduction, which was due to expire after 2025, is made permanent; the phase-in range above the threshold widens to $75,000, $150,000 for joint filers, which the 2026 figures reflect; and a $400 minimum deduction applies to taxpayers with at least $1,000 of qualified business income from an active business.
Sources
- IRS: Qualified business income deduction (who may claim it; the QBI and REIT/PTP components; the limit of 20 percent of taxable income minus net capital gain; what is not QBI; Forms 8995 and 8995-A; the minimum deduction for tax years after 2025)
- IRS: Section 199A qualified business income deduction FAQs (the specified service fields; the W-2 wage and UBIA limits; the limits do not apply at or below the threshold; excluded income items)
- IRS Instructions for Form 8995-A (the SSTB definition; the greater of 50 percent of W-2 wages or 25 percent of W-2 wages plus 2.5 percent of UBIA; the phase-in; SSTB treatment within and above the range)
- IRS Rev. Proc. 2025-32, section 4.26 (the 2026 threshold and phase-in range amounts under section 199A)
- Congressional Research Service, Tax Provisions in P.L. 119-21, the FY2025 Reconciliation Law (the deduction made permanent; the phase-in range widened to $75,000 and $150,000; the $400 minimum deduction with at least $1,000 of QBI; applies after December 31, 2025)
General information based on the sources above, not tax, legal or financial advice.