Section 199A Regulations: QBI Deduction, Thresholds, and Limits

The Section 199A QBI deduction lets owners of pass-through businesses subtract up to 20 percent of their qualified business income from taxable income. For the 2026 tax year, the full deduction is available to single filers with taxable income at or below $201,750 and joint filers at or below $403,500. Above those figures, a phase-out range brings in wage, property, and service-business limits that can reduce or eliminate the deduction.¹ The deduction was originally scheduled to expire after 2025, but the One Big Beautiful Bill Act made it permanent, widened the phase-out ranges, and added a minimum deduction floor for active owners.²

What Counts as Qualified Business Income

QBI is the net profit from a domestic trade or business after ordinary expenses like rent, supplies, and wages. Only income effectively connected with a U.S.-based business counts.³ Several categories that flow through a business entity are stripped out because they aren’t operating profit: capital gains and losses, dividends, and annuity payments unrelated to the business; interest that isn’t tied to business operations; reasonable compensation paid to an S corporation shareholder; and guaranteed payments to a partner.⁴

If you’re self-employed, the deductible half of your self-employment tax, your self-employed health insurance deduction, and contributions to plans like a SEP-IRA or SIMPLE IRA all reduce QBI before the 20 percent calculation.⁴ Skipping these adjustments overstates QBI and matters most near the phase-out thresholds.

Who Can Claim It

The deduction is for individuals who own pass-through businesses: sole proprietorships, partnerships, LLCs taxed as partnerships or sole proprietorships, and S corporations. Trusts and estates holding qualifying interests can claim it too, with QBI, wages, and property basis allocated between the entity and its beneficiaries.⁵

A few boundaries are worth noting. C corporations and their shareholders cannot claim the deduction, since those businesses pay the flat 21 percent corporate rate. The deduction only reduces income tax, not self-employment tax. And you can claim it whether you itemize or take the standard deduction.⁴

Income Thresholds and Phase-Out for 2026

Below the income threshold, you get a straightforward 20 percent deduction without worrying about wage limits or service business rules. For 2026, the thresholds (based on taxable income calculated before the QBI deduction) are:

Single filers: $201,750
Married filing jointly: $403,500
Married filing separately: $201,775

These figures come from the IRS inflation adjustment for the 2026 tax year.¹

Above the threshold, restrictions phase in over a range. Starting in 2026, that range is $75,000 wide for single filers and $150,000 wide for joint filers, up from $50,000 and $100,000 under prior law.³ The top of the phase-out sits at $276,750 for single filers and $553,500 for joint filers in 2026.¹

Inside the phase-out range, two things happen. Non-service businesses become subject to wage and property limits. Specified service businesses face a steeper reduction: their QBI, wages, and property basis are all scaled down by the applicable percentage, which drops from 100 percent to zero across the range. Once a service business owner’s income clears the top of the range, the deduction disappears entirely for that business.

W-2 Wage and Qualified Property Limits

Above the income thresholds, the deduction for each business is capped at the greater of these two amounts:⁶

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

You use whichever formula gives the larger number. The deduction still can’t exceed 20 percent of the business’s QBI, so these tests only bind when they produce something lower. A solo consultant with no employees and no significant equipment can hit a wall here; a manufacturer with a large payroll and expensive machinery often sees no practical reduction.

Qualified property means tangible, depreciable property used in the business, valued at its original cost when placed in service without reduction for depreciation. If property was inherited, UBIA is generally the fair market value at the date of death, with a new depreciable period starting then. Property counts only during a window ending on the later of 10 years after it was placed in service or the last day of its full depreciation recovery period.⁷

Specified Service Businesses

Certain professional service fields are singled out for restriction, on the reasoning that high-earning professionals shouldn’t be able to reclassify compensation as business income for a 20 percent cut. These specified service trades or businesses (SSTBs) include health care, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, and brokerage services. A catch-all covers businesses whose main asset is someone’s fame or personal brand: endorsements, paid appearances, and licensing of a name or image.

Architecture and engineering are deliberately excluded from the SSTB list, so owners in those fields qualify for the full deduction regardless of income. A doctor, lawyer, or financial advisor above the phase-out sees the deduction reduced and eventually eliminated.

The De Minimis Rule

A business that does some service work but isn’t primarily a service business can escape SSTB treatment entirely. If gross receipts are $25 million or less and less than 10 percent comes from specified service activities, the whole business is non-SSTB. Above $25 million in gross receipts, the threshold drops to 5 percent.⁸ Crossing that line flips the classification for the entire business, not just the service portion.

Rental Real Estate

Rental income can qualify, but it isn’t automatic. The IRS offers a safe harbor treating a rental real estate enterprise as a trade or business if you log at least 250 hours of rental services per year in three of the five most recent consecutive tax years. If you’ve held the property fewer than five years, you need 250 hours every year.⁹

Hours have to be documented in contemporaneous records showing the date, description, duration, and who performed each service. Separate books and records are required for each rental enterprise, and you must attach a signed statement to your return confirming you met the safe harbor.⁹

Some rentals are ineligible for the safe harbor no matter how many hours you log. Triple net leases don’t qualify. Property you use as a personal residence doesn’t qualify. Arranging financing, reviewing financial statements, and planning long-term capital improvements don’t count toward the 250 hours. Even without the safe harbor, a rental can still qualify if it rises to the level of a trade or business under general tax principles; the safe harbor just provides a clear path.

REIT Dividends and Publicly Traded Partnership Income

The 20 percent deduction also applies to qualified REIT dividends and your share of publicly traded partnership income. These form a separate component of the deduction, not subject to the W-2 wage or property limits.⁴

Not every REIT dividend qualifies. Capital gain dividends and dividends taxed at qualified dividend rates are excluded. There’s also a holding period: you must hold the REIT shares more than 45 days in the 91-day window around the ex-dividend date.¹⁰ For PTPs, your allocable share must be effectively connected with a U.S. business and remains subject to passive activity rules. If a PTP is in a specified service field, the SSTB limits apply just as they would to a business you own directly.

Business Losses and Carryovers

A net loss reduces the QBI available for the deduction, and the mechanics depend on whether you own one business or several.

With a single business (or combined QBI across all businesses that’s negative), the deduction is zero for the year. The negative QBI carries forward and is treated as coming from a separate business in the next year, offsetting future positive QBI. The W-2 wages and property basis from the loss year do not carry forward; only the loss amount does. The carryforward continues indefinitely until absorbed.

If you own several businesses and the combined total is positive but at least one has negative QBI, the losses are allocated proportionally among the profitable businesses before the deduction is calculated for each. Wages and property from the loss business are disregarded during netting. That proportional allocation can meaningfully reduce the deduction from otherwise profitable businesses, which is one reason aggregation sometimes produces a better result.

Aggregating Multiple Businesses

If you own interests in several businesses, you can elect to aggregate some or all of them and treat the group as a single business for QBI purposes. The main payoff is pooling W-2 wages and property basis across entities, which can lift the deduction for businesses that would otherwise fail the wage and property tests. Aggregation also eliminates the proportional loss netting above; a loss from one entity offsets profit from another without touching anyone’s wage or property numbers.

To aggregate, all of the following must be true:¹¹

The same person or group owns at least 50 percent of each business (by shares for S corporations, capital or profits interest for partnerships).
That 50 percent 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 aggregated businesses is a specified service trade or business.
The businesses meet at least two of three operational factors: similar or commonly bundled products and services; shared facilities or centralized functions like HR, accounting, or IT; or coordinated operations such as supply chain relationships.

You must attach a disclosure statement to your return each year identifying each business, its EIN, and any changes. If you skip the statement, the IRS can break up the aggregation, and you’re locked out of re-aggregating those businesses for three years.¹¹

The Overall Taxable Income Cap

After all the QBI calculations, wage tests, and property limits, one final ceiling applies: your total Section 199A deduction cannot exceed 20 percent of your taxable income minus net capital gain. Net capital gain here includes long-term capital gains and qualified dividends taxed at preferential rates.⁴ This cap rarely bites business owners whose income comes mainly from operations, but it can matter in a year with large stock sales or other capital gains.

Minimum Deduction for Active Owners

Starting in 2026, the OBBBA adds a floor. If your combined QBI from businesses where you materially participate is at least $1,000, your Section 199A deduction cannot be less than $400. Both amounts are indexed for inflation in future years.³ The floor mainly helps small business owners whose calculated deduction would otherwise be reduced to almost nothing by the wage and property limits.

How to Report the Deduction

The deduction is claimed on your personal return using one of two forms. Form 8995 is the simplified version, available if your 2026 taxable income before the QBI deduction is at or below the threshold and you aren’t a patron of a specified agricultural or horticultural cooperative.¹² Everyone else uses Form 8995-A, which handles wage and property limits, SSTB phase-outs, aggregation elections, and the other rules that only apply above the thresholds.⁸

Partnerships and S corporations report your share of QBI, W-2 wages, and UBIA of qualified property on your Schedule K-1. Those figures feed directly into Form 8995 or 8995-A. Most reporting errors trace back to K-1 data at the entity level, especially when a business has losses, multiple owners, or an aggregation election in play.

1
Internal Revenue Service. Revenue Procedure 2025-32
2
United States Congress. H.R.1 – 119th Congress – Extension and Enhancement of Deduction for Qualified Business Income
3
Office of the Law Revision Counsel. 26 USC 199A – Qualified Business Income
4
Internal Revenue Service. Qualified Business Income Deduction
5
Federal Register. 26 CFR Part 1 – Qualified Business Income Deduction
6
Internal Revenue Service. Revenue Procedure 2019-11 – Determination of W-2 Wages
7
eCFR. 26 CFR 1.199A-2 – Determination of W-2 Wages and Unadjusted Basis Immediately After Acquisition of Qualified Property
8
Internal Revenue Service. Instructions for Form 8995-A – Qualified Business Income Deduction
9
Internal Revenue Service. Section 199A Trade or Business Safe Harbor – Rental Real Estate (Notice 2019-07)
10
eCFR. 26 CFR 1.199A-3 – Qualified Business Income, Qualified REIT Dividends, and Qualified PTP Income
11
eCFR. 26 CFR 1.199A-4 – Aggregation
12
Internal Revenue Service. Instructions for Form 8995