Section 199A QBI Deduction for Partners: Thresholds, K-1, and Limits

If you’re a partner in a partnership, the Section 199A qualified business income deduction lets you deduct up to 20% of your share of the partnership’s qualified business income on your personal return. The deduction was originally set to expire after 2025, but the One Big Beautiful Bill Act, signed on July 4, 2025, made it permanent and added several changes that take effect for the 2026 tax year. It comes off your taxable income, not your adjusted gross income, so it does not lower your self-employment tax or anything else calculated above the line.

Who Can Claim It

The deduction is for individuals, estates, and certain trusts that receive income from a pass-through entity. Corporations cannot claim it.¹ For a partner, the pass-through is the partnership itself, whether that’s a general partnership, a limited partnership, or an LLC taxed as a partnership. The partnership pays no federal income tax on its own; the income and loss flow through to each partner’s return, and each partner claims the 199A deduction at the personal level.

The partnership has to be engaged in a qualified trade or business conducted within the United States. In practice, that means an activity carried on with regularity to earn a profit, not a hobby and not a passive investment vehicle.² A partnership that just holds a portfolio of stocks and bonds for its partners does not produce qualified business income.

What Counts as Your Qualified Business Income

Your QBI begins with your distributive share of the partnership’s ordinary income and deductions tied to the business. That is the revenue from sales, services, and operations minus the business expenses allocated to you on your Schedule K-1. Several types of income are excluded even when they appear on the same K-1.¹

Capital gains and losses (short-term and long-term) do not count. Dividends and dividend-equivalent payments do not count. Interest income is out unless it has a direct connection to the business, such as interest on customer accounts receivable.

Guaranteed Payments and Outside Services

A guaranteed payment you receive for services under Section 707(c) is excluded from your QBI. It functions like compensation, and the IRS treats it the way it treats a salary.³ The same treatment applies to payments you receive when you’re acting in a capacity other than as a partner, like consulting fees paid to you as an independent contractor.⁴

There is a wrinkle worth knowing. While the guaranteed payment itself is not QBI to the recipient, the partnership’s deduction for making that payment still reduces the partnership’s QBI. The payment shrinks the pot of qualified income for every partner even though it doesn’t count as QBI for the partner who receives it.³

Above-the-Line Deductions That Reduce Your QBI

Some deductions partners routinely take also cut their QBI before the 20% calculation runs. The deductible portion of self-employment tax, self-employed health insurance premiums, and contributions to qualified retirement plans such as a SEP-IRA all come off your QBI first.² Partners who make sizable retirement contributions often find their QBI is meaningfully smaller than the income figure on the K-1 suggests.

The Taxable Income Cap

Your deduction cannot exceed 20% of your taxable income (calculated before the QBI deduction) minus any net capital gain. This overall cap keeps the deduction from sheltering income beyond what the business generates.² For most partners whose business income is the bulk of their earnings, this cap does not bind. It tends to matter when a partner has modest QBI but significant capital gains pushing taxable income up.

Income Thresholds for 2026

Two sets of restrictions turn on once your taxable income clears a threshold. For 2026, the thresholds are $201,750 for single filers and $403,500 for married couples filing jointly.⁵ Below those levels, you take the full 20% no matter what type of business the partnership runs and no matter what it pays in wages.

Above the threshold, two things happen. If the partnership is in a specified service field, the deduction begins to phase out. For every business, service or not, the W-2 wage and property limits described below begin to phase in.

Specified Service Businesses

The IRS defines specified service trades or businesses to include health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, and investing or investment management. Any business whose principal asset is the reputation or skill of its owners or employees also falls in this category if income comes from endorsements, licensing an individual’s image or likeness, or appearance fees.⁶ Engineering and architecture are not on the list; Congress carved them out.

The Phase-Out Range

For 2026, the deduction phases out completely for service businesses at $276,750 for single filers and $553,500 for joint filers.⁵ The phase-out range is $75,000 for single filers and $150,000 for joint filers, wider than under the original 2017 law. Inside that range, only a percentage of your QBI, W-2 wages, and qualified property basis are treated as coming from a qualified business. Once your income clears the upper end of the range, a service business partner’s deduction drops to zero, unless the new minimum deduction described further down applies.

W-2 Wage and Property Limits for Higher-Income Partners

Once your taxable income is above the threshold, the deduction for each business is capped at the greater of two amounts, whether or not the business is a service trade:

50% of the W-2 wages the partnership paid its employees during the year, or
25% of those W-2 wages plus 2.5% of the unadjusted basis immediately after acquisition of the partnership’s qualified property (tangible depreciable assets like equipment and buildings that have not reached the end of their depreciable life).

These limits sit in Section 199A(b)(2).¹ The first test favors labor-heavy partnerships such as law firms, staffing agencies, and construction outfits. The second favors capital-heavy businesses that own expensive machinery or real estate but run a small payroll. You use whichever produces the larger number.

For partners whose income lands within the phase-out range rather than above it, these limits phase in proportionally, so their full weight doesn’t land until you clear the upper threshold. Partners below the lower threshold ignore them entirely.

The $400 Minimum Deduction

Beginning with the 2026 tax year, a partner who materially participates in a qualified trade or business is guaranteed a minimum deduction of $400, as long as total QBI from all active businesses is at least $1,000. This floor applies even when the normal 20% calculation or the wage-and-property limits would produce something smaller.⁷ The $400 amount will be adjusted for inflation after 2026, rounded to the nearest $5. The provision mainly helps partners in service businesses whose income just barely exceeds the full phase-out threshold; without it, they would lose the deduction entirely.

Losses Across Multiple Businesses

If you hold interests in more than one business, losses in one can shrink the deduction from another. The rules are mechanical.

If your combined QBI across all businesses is negative for the year, your Section 199A deduction is zero. The net loss carries forward to the next year, where it is treated as coming from a separate trade or business and offsets future positive QBI. The loss carries indefinitely until absorbed, but the W-2 wages and property basis from the loss business do not carry forward with it; only the loss amount moves.

If your overall QBI is positive but one or more individual businesses lost money, the negative QBI from the losers is allocated proportionally among the profitable ones before you calculate the deduction. That allocation also wipes out the W-2 wages and property basis tied to the loss businesses for that year. A single money-losing venture can meaningfully dilute the QBI from several profitable ones.

Losses from qualified REIT dividends and publicly traded partnership income are tracked separately. A net loss in that bucket cannot offset your operating QBI; it only carries forward to offset future REIT dividends and PTP income.

Aggregating Multiple Partnership Interests

The default rule is that you calculate 199A separately for each business. If you own interests in multiple partnerships that work together, aggregating them into a single unit can help, because pooling W-2 wages and property basis across businesses is useful when one business earns most of the income but another employs most of the workers or owns most of the equipment.

To aggregate, you must meet all of the following:⁸

The same person or group owns 50% or more of each business, measured by capital or profits for partnerships.
That ownership exists for the majority of the tax year, including the last day.
All businesses report on returns with the same taxable year.
None of the businesses is a specified service trade or business.
The businesses share at least two of three operational factors: similar or complementary products, shared facilities or centralized functions such as accounting or HR, or coordinated operations through supply chain relationships or similar interdependencies.

Once you aggregate, you must keep that grouping in every future tax year and attach a disclosure statement identifying each business in the group. Miss the statement and the IRS can break up the aggregation, locking you out of aggregating those businesses for the next three years.⁸

If Your Partnership Interest Is in a Publicly Traded Partnership

PTP income has its own path under 199A. You can deduct up to 20% of your qualified PTP income, and this component is not subject to the W-2 wage or property basis limits that apply to operating businesses.² The absence of wage limitations means you get the full 20% as long as you’re under the income thresholds. If the PTP itself runs a specified service business, the same income-based phase-out applies once you clear the threshold. PTP income and losses net separately from your operating QBI.

Reading the K-1

The partnership reports your Section 199A information on Schedule K-1 (Form 1065). The data you need is in Box 20, Code Z, not Code V, which covers unrelated business taxable income.⁹ Most partnerships attach a supplemental statement that breaks out the components you need.

That statement should list your share of QBI from each of the partnership’s trades or businesses, any qualified REIT dividends, and qualified PTP income. If your income is above the threshold, it also has to report your allocable share of W-2 wages and the unadjusted basis of qualified property. Without those numbers, you cannot finish the wage and property limitation calculations. If the K-1 you receive is missing 199A detail, contact the partnership. The information is required, and guessing at the numbers creates problems.

Filing the Deduction

Which form you use depends on your income. Partners whose 2026 taxable income (before the QBI deduction) is at or below $201,750 (or $403,500 on a joint return) use Form 8995, the simplified version.⁶ Above those levels, or if you have specified service business phase-outs to account for, use Form 8995-A, which walks through the wage and property limits step by step.

After completing the form, put the deduction on Line 13a of your Form 1040. Because it is a below-the-line deduction taken after adjusted gross income, it does not lower your self-employment tax or your net investment income tax. It is available whether you itemize or take the standard deduction.

Stricter Penalty Threshold

The IRS applies a tighter accuracy standard to returns that claim this deduction. A substantial understatement of income tax normally kicks in when the understatement exceeds 10% of the tax that should have been reported. For taxpayers claiming 199A, that threshold drops to 5%.¹⁰ The penalty is 20% of the underpayment. Errors in the QBI calculation are more likely to trigger penalties than comparable mistakes elsewhere on the return, so getting the K-1 data right and choosing the right form matters.

1
Office of the Law Revision Counsel. 26 USC 199A – Qualified Business Income
2
Internal Revenue Service. Qualified Business Income Deduction
3
eCFR. 26 CFR 1.199A-3 – Qualified Business Income, Qualified REIT Dividends, and Qualified PTP Income
4
Office of the Law Revision Counsel. 26 USC 707 – Transactions Between Partner and Partnership
5
Internal Revenue Service. Revenue Procedure 2025-32
6
Internal Revenue Service. Instructions for Form 8995 – Qualified Business Income Deduction
7
Office of the Law Revision Counsel. 26 USC 199A – Qualified Business Income – Section: Minimum Deduction for Active Qualified Business Income
8
eCFR. 26 CFR 1.199A-4 – Aggregation
9
Internal Revenue Service. Partners Instructions for Schedule K-1 Form 1065
10
Office of the Law Revision Counsel. 26 US Code 6662 – Imposition of Accuracy-Related Penalty on Underpayments