The QBI deduction generally lets owners of pass-through businesses deduct up to 20% of their qualified business income, and the One Big Beautiful Bill Act (OBBBA) made it permanent in 2025. Sole proprietors, partners, S corporation shareholders, and some trusts and estates can claim it, subject to taxable income thresholds and, above them, wage and property limits. For 2026 and later tax years, the phase-in ranges are wider than they were and a minimum deduction applies, $400 for 2026 and indexed after that. Here is who qualifies, how the math works, and where the planning levers sit.
The QBI deduction, created by Section 199A in the 2017 tax reform, lets individuals and some trusts and estates deduct up to 20% of qualified business income from partnerships, S corporations, sole proprietorships, and qualifying rentals. Congress built it as a rough counterweight to the 21% corporate rate, and the OBBBA removed its scheduled expiration in July 2025.
Qualified business income is the net amount of qualified items of income, gain, deduction, and loss from a U.S. trade or business. It excludes capital gains and losses, dividends, interest not allocable to the business, reasonable compensation paid to an S corporation shareholder, guaranteed payments to a partner, and any tips deducted under Section 224, the OBBBA's qualified tips deduction. Wages earned as a common-law employee never count; statutory employees reporting on Schedule C are the exception. A parallel 20% deduction applies to qualified REIT dividends and publicly traded partnership (PTP) income with no wage or property limit, though PTP income from a specified service trade or business (SSTB) stays subject to the SSTB rules; REIT dividends do not.
One point worth repeating to clients: the deduction reduces income tax only, never self-employment tax.
Any individual with pass-through income from a U.S. trade or business potentially qualifies: Schedule C sole proprietors, single-member LLC owners, partners, S corporation shareholders, and farmers. Trusts and estates with business income qualify too, using the non-joint threshold. For the self-employed, QBI is not simply net profit: under Treasury Regulation Section 1.199A-3, it is reduced by the deductible half of self-employment tax, self-employed health insurance, and retirement contributions attributable to the business.
Rental real estate qualifies through any of three routes. The activity can rise to a Section 162 trade or business on its facts. It can meet the Rev. Proc. 2019-38 safe harbor: 250 hours of rental services per year (or in three of the last five years once the enterprise has run four or more), separate books, contemporaneous records, and a statement attached to the return, with triple net leases and residences the taxpayer uses excluded. Or it can be a self-rental to a commonly controlled operating business, whether the taxpayer runs that business directly or through a pass-through entity (a C corporation tenant does not count), which the regulations treat as a Section 199A trade or business even when the rental alone would not qualify. One caution on that route: rent from a commonly controlled SSTB is treated as SSTB income under Treasury Regulation Section 1.199A-5(c)(2).
Who does not qualify: C corporations and their shareholders on corporate earnings, and common-law employees on W-2 wage income. QBI from an SSTB drops out once taxable income clears the top of the phase-in range, but that exclusion runs at the business level, not the taxpayer level: non-SSTB income on the same return still qualifies. Investment income stays out of QBI no matter who earns it.
Below the taxable income threshold, the computation is simple: 20% of QBI, no wage test, SSTB status irrelevant, subject only to the overall cap of 20% of taxable income minus net capital gain and the $400 minimum backstop. Above the threshold, limits phase in across a range, then apply in full. The measure is taxable income before the QBI deduction, not business income, and it is computed without regard to the Section 68 limitation on itemized deductions (Section 199A(e)(1), as amended by OBBBA Section 70111).
The minimum deduction is $400 for taxpayers with at least $1,000 of aggregate QBI from active qualified trades or businesses, regardless of filing status.
The 2026 figures come from Rev. Proc. 2025-32; the $25 gap between the single and married filing separately figures is a rounding artifact of Section 1(f)(7), which rounds the separate-filer increase to $25 rather than $50. The thresholds are indexed for inflation each year, and the $400 and $1,000 minimum-deduction figures index beginning in 2027. The $75,000 and $150,000 range widths are fixed in the statute, so the top of each range moves only as the threshold does.
Once taxable income clears the top of the range, the QBI component for each business is capped at the greater of 50% of the business's W-2 wages, or 25% of W-2 wages plus 2.5% of the unadjusted basis immediately after acquisition (UBIA) of qualified property. Inside the range, that cap phases in rather than applying outright; the mechanics are worked through below. QBI, wages, and UBIA from an SSTB are excluded entirely above the top of the range, though the same taxpayer's non-SSTB businesses still count.
Treasury Regulation Section 1.199A-5 defines the specified service categories.
The reputation-or-skill category is narrower than clients fear: the regulations limit it to endorsement income, licensing of a person's image or likeness, and appearance fees.
The ordering rules in Treasury Regulation Section 1.199A-1 run the same sequence every time: compute QBI per business, net any negative QBI (including a prior-year carryforward) proportionately against the businesses with positive QBI, apply any wage and UBIA limits to what remains, add 20% of REIT and PTP income, then cap the total at 20% of taxable income minus net capital gain. There is one final step: a taxpayer with at least $1,000 of aggregate QBI from active qualified trades or businesses takes the greater of that ordinary result or the $400 minimum. The overall cap is easy to overlook, so check it first on review.
Facts: single filer, 2026, freelance web developer (not an SSTB), $120,000 of Schedule C net profit, no other income, standard deduction, no self-employed health insurance or retirement contributions.
Note what happened: the taxable income cap set the deduction, not 20% of QBI. That is the expected result for a single-income sole proprietor, because the standard deduction pulls taxable income below QBI, and it is easy to skip in a back-of-envelope estimate.
Facts: married filing jointly, 2026. One spouse owns 100% of a non-SSTB e-commerce S corporation. K-1 ordinary income, all QBI: $400,000. The company paid $150,000 in total W-2 wages, including the owner's $100,000 salary, and holds $100,000 of UBIA. The other spouse's wages bring joint taxable income before the deduction to $560,000, above the $553,500 top of the 2026 phase-in range, so the limits apply in full.
Now change one fact. If the business were a law practice, the deduction is zero: SSTB income gets nothing above the top of the range, and because an SSTB at that income is not a qualified trade or business, the $400 minimum does not apply either. Drop the couple's taxable income to $380,000 instead, say with no second salary and a large charitable deduction, and the SSTB and wage limitations fall away, but the overall cap does not: with $400,000 of QBI and no net capital gain, the deduction is 20% of $380,000, or $76,000, not the full $80,000. SSTB planning is a cliff question measured by taxable income, and the overall cap follows the return all the way down.
One lever worth modeling when the wage limit binds: shareholder compensation cuts both ways, since a higher salary reduces QBI but raises the W-2 wage base. Model the tradeoff rather than defaulting to either extreme, and remember reasonable compensation standards constrain the range.
Between the threshold and the top of the range, the wage and UBIA limit does not apply as a hard cap. Instead, the tentative 20% amount is reduced by a slice of the shortfall: take the excess of 20% of QBI over the wage and UBIA limit, then multiply by the share of the range the taxpayer has crossed. The mechanism is Section 199A(b)(3)(B) itself, walked through in Treasury Regulation Section 1.199A-1(d)(2)(iv). SSTB owners face the same math plus a shrinking applicable percentage of QBI, wages, and UBIA that hits zero at the top of the range.
Rerun Example 2 with joint taxable income of $478,500, exactly halfway through the 2026 range. The excess is $80,000 minus $75,000 = $5,000, the phase-in percentage is 50%, so the reduction is $2,500 and the QBI component is $77,500. The overall cap, 20% x $478,500 = $95,700, does not bind. Holding QBI, wages, and UBIA constant, each additional $1,000 of other taxable income (the second spouse's wages here) costs this couple about $33 of deduction, the $5,000 shortfall spread across the $150,000 range. That is the number to put in front of a client deciding whether to accelerate or defer other income.
Section 70105 of the OBBBA made three changes, all effective for tax years beginning after December 31, 2025:
Two other OBBBA sections also touched Section 199A. Section 70111(b) provides that taxable income for Section 199A purposes is computed without regard to the Section 68 limitation on itemized deductions. Section 70201(d) excludes from QBI any amount deducted as qualified tips under Section 224, so a self-employed client who takes the tips deduction has those dollars removed from the QBI base.
The minimum can beat the ordinary math from any direction: $1,000 of active QBI would normally produce a $200 deduction, and the minimum lifts it to $400 even where the wage limits or the overall income cap would have allowed less. Beyond that edge case, the widened ranges matter far more in planning, since they change the marginal math for every owner near the cliff. Quarterly estimates for those clients deserve a fresh look and our mid-year estimated tax check blog post covers the recalculation.
Use Form 8995 when taxable income before the deduction is at or below the threshold and the taxpayer is not a patron in a specified agricultural or horticultural cooperative. Everyone else files Form 8995-A, which handles the phase-in computation, SSTB rules, aggregation elections, and loss netting. Pass-through owners need the Section 199A statement attached to the K-1: a missing statement can cause the deduction to be omitted or miscomputed in software. Negative QBI does not disappear either; net negative QBI across all businesses carries forward and reduces next year's QBI.
Close calls, like rental QBI treatment or an SSTB classification that could go either way, deserve a file memo: for the client, and for whoever reviews the return in three years. Our tax research memo guide walks through the format.
QBI questions rarely arrive one at a time. An SSTB classification call leads to the phase-in math, which leads to entity compensation planning, and every step needs authority behind it. Marble's Intelligence agent is built for exactly this workflow: ask a federal or state tax question in plain English and get instant citation-backed answers linked to the Code, regulations, and IRS guidance, plus memos and client communications ready for your review. Sign up for Marble.
C corporations and their shareholders, and common-law employees on W-2 wage income. Above the top of the phase-in range ($276,750 single or $553,500 joint for 2026), income from specified service businesses such as law, accounting, health, consulting, and financial services is excluded, though non-SSTB income on the same return still qualifies. Investment income such as capital gains, dividends, and portfolio interest also falls outside QBI regardless of who earns it.
The OBBBA made the 20% QBI deduction permanent and, beginning with 2026 tax years, widened the phase-in ranges to $75,000 for non-joint filers and $150,000 for joint filers. It also added an inflation-indexed minimum deduction of $400 for taxpayers with at least $1,000 of aggregate QBI from businesses in which they materially participate, and it excludes from QBI any tips deducted under Section 224. The 20% rate itself did not change.
Yes. Schedule C income from a U.S. trade or business is qualified business income whether or not you have employees or an LLC. Reduce net profit by the deductible half of self-employment tax, self-employed health insurance, and retirement contributions before applying the 20%, and remember the deduction reduces income tax only, not self-employment tax.
The 2026 taxable income thresholds are $201,750 for single filers and heads of household ($201,775 for married filing separately) and $403,500 for joint filers, with the limits fully phased in at $276,750 and $553,500. Above the threshold the wage and UBIA limitation begins to phase in; once taxable income clears the top of the range, a non-SSTB QBI component is fully limited to the greater of 50% of W-2 wages or 25% of wages plus 2.5% of UBIA. The minimum deduction is $400, and the thresholds index annually.
If you report income from a sole proprietorship, partnership, S corporation, or qualifying rental on your individual return, you likely qualify. The ordinary computation is 20% of QBI, subject to the overall cap of 20% of taxable income minus net capital gain; a taxpayer with at least $1,000 of aggregate active QBI receives the greater of that result or the $400 minimum. Above the threshold, run the wage and UBIA limit and, for service businesses, the SSTB phase-out.
For a pass-through owner in the top 37% bracket who qualifies for the full deduction, yes: it cuts the effective federal income tax rate on that income to 29.6%. That is an income tax comparison only; self-employment tax, payroll taxes, and the net investment income tax are unaffected, and wage limits or SSTB status can shrink the deduction at higher incomes. The deduction itself requires no election, though eligible businesses can be aggregated by election, and there is no downside to claiming it when eligible.
