How to Calculate Your QBI Deduction: 2026 Thresholds and Wage Cap

To calculate the QBI deduction, start with the net profit from your pass-through business, multiply it by 20 percent, and then check whether your taxable income is high enough to trigger the wage and property caps that limit the deduction above certain thresholds. For the 2026 tax year, those thresholds are $201,750 for single and head-of-household filers and $403,500 for married couples filing jointly. Below those figures the math is a single multiplication. Above them, several extra steps kick in, and the type of business you run starts to matter.

Step 1: Figure Your Qualified Business Income

Qualified business income is the net profit from a domestic trade or business operated as a sole proprietorship, partnership, S corporation, or through certain trusts and estates.¹ Take ordinary income from the business and subtract the ordinary deductions connected to it. Capital gains and losses, dividends, and interest income that isn’t tied to the business are excluded.²

Two exclusions catch people out. If you own an S corporation, strip out the reasonable compensation you pay yourself as an employee before you calculate QBI.¹ If you’re a partner in a partnership, exclude guaranteed payments you receive for services, which are treated more like wages than business profit.³ The deduction targets business profit, not compensation for labor.

You don’t have to build the QBI figure from scratch. Sole proprietors pull it from Schedule C. Partners and S corporation shareholders find it on the Schedule K-1 issued by the entity. If you own interests in more than one business, calculate QBI separately for each before combining them.

Step 2: Check Your Taxable Income Against the 2026 Threshold

Your taxable income before the QBI deduction decides which version of the calculation you use. For 2026, the lower threshold is $201,750 for single and head-of-household filers and $403,500 for joint filers. At or below those numbers, you skip the wage and property limits entirely.

Above the lower threshold, income enters a phase-in range where limitations gradually apply. The One Big Beautiful Bill Act widened this range starting in 2026: $75,000 for single filers and $150,000 for joint filers, up from $50,000 and $100,000 under the prior rules. The upper end of the phase-in therefore sits around $276,750 for single filers and $553,500 for joint filers in 2026. Once you’re above the upper end, the full wage and property caps apply, and specified service businesses lose the deduction entirely.

Step 3a: The Simple Calculation Below the Threshold

If your taxable income falls at or below $201,750 (single) or $403,500 (joint), multiply your QBI from each qualified business by 20 percent.² That’s your tentative deduction. One final cap applies: the total deduction cannot exceed 20 percent of your taxable income minus any net capital gains. This overall limit keeps the deduction working against ordinary income only.

At this income level, none of the complications matter. It doesn’t matter whether you pay W-2 wages, own any qualified property, or run a specified service business. Those questions become relevant only once your income climbs past the threshold.

Step 3b: The Wage and Property Cap Above the Threshold

Above the upper end of the phase-in range, the deduction for each qualified business is capped at the greater of two formulas:⁴

50 percent of the W-2 wages paid by the business, or
25 percent of W-2 wages plus 2.5 percent of the unadjusted basis immediately after acquisition (UBIA) of qualified property.

Compare both results, take the larger, then compare that figure to 20 percent of the business’s QBI. Your deduction for the business is the smaller of the two.

Here’s how the numbers fit together. Suppose a business earns $300,000 of QBI, pays $80,000 in W-2 wages, and holds $600,000 in qualified property. Twenty percent of QBI is $60,000. The wage-only test produces $40,000. The wage-plus-property test yields $20,000 plus $15,000, or $35,000. The greater of the two caps is $40,000. Because $40,000 is less than the $60,000 tentative deduction, the deduction for that business is $40,000.

Two definitions matter here. W-2 wages are the total wages the business paid subject to federal income tax withholding, plus elective deferrals into retirement plans and deferred compensation, taken from W-2 forms issued for the calendar year ending during your tax year.⁵ UBIA is the original cost of tangible, depreciable assets the business uses to produce QBI, such as machinery, office equipment, vehicles, and commercial buildings. An asset counts toward UBIA for the longer of its regular depreciation recovery period or ten years from the date placed in service, then drops out.

If a business has no employees and owns no qualified property, both formulas produce zero, and the deduction for that business is zero no matter how much QBI it generates. This is the mechanism that prevents high earners from claiming large deductions through businesses that employ nobody and own no significant assets.

Step 3c: The Phase-In Calculation

If your taxable income lands inside the phase-in band, the wage and property limits apply proportionally. The further into the range you sit, the more the cap bites. For a non-service business, the process runs like this:

Calculate 20 percent of QBI as the tentative deduction.
Calculate the wage-and-property cap using the greater of the two formulas above.
Subtract the cap from the tentative deduction. Call this the reduction amount.
Multiply the reduction amount by your phase-in percentage, which equals your income above the lower threshold divided by the width of the phase-in range ($75,000 for single filers, $150,000 for joint filers in 2026).
Subtract that product from the tentative deduction. The result is your deduction for the business.

Near the bottom of the range, the phase-in percentage is close to zero and the cap barely reduces your deduction. Near the top, the percentage approaches 100 percent, and the full cap applies.

Special Rule for Specified Service Businesses

A specified service trade or business (SSTB) faces harsher treatment once income climbs past the lower threshold. The following fields are classified as SSTBs:⁶

Health care
Law
Accounting
Actuarial science
Performing arts
Consulting
Athletics
Financial services
Brokerage services
Any business whose principal asset is the reputation or skill of its owners or employees

Engineering and architecture are not on the list, so a business in either field is not an SSTB despite being a professional service.

Below the lower threshold, SSTB status doesn’t matter. Inside the phase-in range, the calculation shrinks not just the deduction but the amount of QBI, W-2 wages, and UBIA that count at all. The share that counts equals the inverse of the phase-in percentage: if you’re 40 percent through the range, only 60 percent of your QBI, wages, and property basis feed into the calculation. Above the upper threshold, no portion of the SSTB income qualifies, and the deduction on that business drops to zero.

Add REIT Dividends and PTP Income Separately

Qualified REIT dividends and qualified publicly traded partnership income run on their own track. They aren’t part of QBI, but Section 199A adds them back as a separate 20 percent deduction component.³ The wage and property limits don’t touch this piece. Take 20 percent of those amounts and add the result to whatever QBI deduction you calculated for your operating businesses.

The combined total still cannot exceed 20 percent of your taxable income minus net capital gains.² If you own no operating business but receive qualified REIT dividends through a brokerage account, you can still claim the deduction on those dividends.

If You Have a Business Loss

A net loss from one qualified business offsets QBI from your other qualified businesses. If your combined QBI is negative for the year, you get no QBI deduction, and the net loss carries forward to reduce QBI in future years.⁷ The carryforward survives even if the business that produced it no longer exists.

REIT dividends and PTP income are separate. Even if your overall QBI is negative, you can still claim the 20 percent deduction on qualified REIT dividends and PTP income for the year. The QBI deduction also can’t create or increase a net operating loss under Section 172.

Which Form to File

Use Form 8995 (Qualified Business Income Deduction Simplified Computation) if your taxable income before the QBI deduction is at or below the lower threshold and you aren’t a patron of a specified agricultural or horticultural cooperative.⁸ Everyone else uses Form 8995-A, which carries the extra schedules for the wage-and-property limits, SSTB phase-in, aggregation elections, and loss carryforwards.

Move the numbers from your Schedule C or Schedule K-1 onto the appropriate lines. The final deduction lands on line 13a of Form 1040 or 1040-SR.⁹ It reduces taxable income but does not reduce adjusted gross income, self-employment tax, or net investment income tax. You claim it whether or not you itemize.

The Tighter Penalty Standard

Claiming the QBI deduction lowers the threshold for accuracy-related penalties. Normally a substantial understatement of income tax triggers a 20 percent penalty when the understatement exceeds the greater of 10 percent of the tax due or $5,000. For any taxpayer who claims the Section 199A deduction, that 10 percent figure drops to 5 percent.¹⁰ A smaller miscalculation can therefore trigger the penalty. Keep the W-2 wage figures and UBIA schedules that feed the above-threshold limits well-documented.

1
Internal Revenue Service. Qualified Business Income Deduction
2
Office of the Law Revision Counsel. 26 USC 199A – Qualified Business Income
3
Office of the Law Revision Counsel. 26 US Code 199A – Qualified Business Income
4
CCH AnswerConnect. QBI Deduction Calculation
5
eCFR. 26 CFR 1.199A-2 – Determination of W-2 Wages and Unadjusted Basis Immediately After Acquisition of Qualified Property
6
eCFR. 26 CFR 1.199A-5 – Specified Service Trades or Businesses and the Trade or Business of Performing Services as an Employee
7
Internal Revenue Service. Instructions for Form 8995-A (2025)
8
Internal Revenue Service. About Form 8995, Qualified Business Income Deduction Simplified Computation
9
Internal Revenue Service. Instructions for Form 8995 (2025)
10
Office of the Law Revision Counsel. 26 US Code 6662 – Imposition of Accuracy-Related Penalty on Underpayments