For 2026, the Section 199A income thresholds and phase-outs start at $201,750 of taxable income for single and head-of-household filers and $403,500 for married couples filing jointly. Stay at or below those numbers and you can claim the full 20% qualified business income deduction without worrying about your business type, your payroll, or your property holdings. Go above them and the deduction begins to shrink across a phase-out window, with the outcome at the top of that window depending on what kind of business you run.
The 2026 Threshold Amounts
The IRS set the 2026 thresholds in Revenue Procedure 2025-32:
- Single and head of household: $201,750
- Married filing jointly: $403,500
- Married filing separately: $201,775
These figures adjust each year for inflation. In 2025 the same thresholds sat at $197,300 and $394,600.1Internal Revenue Service. Instructions for Form 8995-A The One Big Beautiful Bill Act also made Section 199A permanent; before that legislation, the deduction was scheduled to expire for tax years beginning after December 31, 2025.
If your taxable income falls at or below the threshold that matches your filing status, the calculation is simple: 20% of your qualified business income, subject to an overall cap of 20% of taxable income minus net capital gains. The type of business does not matter at this level, and neither does what you pay employees.2Office of the Law Revision Counsel. 26 USC 199A – Qualified Business Income
How the Phase-Out Window Works
Crossing the threshold does not eliminate the deduction. It opens a phase-out range where the limitations gradually take hold. Starting in 2026, the One Big Beautiful Bill Act widened those ranges:
- Single, head of household, and married filing separately: $75,000 above the threshold, up from $50,000 in prior years
- Married filing jointly: $150,000 above the threshold, up from $100,000 in prior years
So for 2026, a single filer’s phase-out runs from $201,750 to $276,750. A married couple filing jointly phases out from $403,500 to $553,500. The wider windows help taxpayers who previously found themselves fully phased out under the older $50,000 and $100,000 ranges.
Inside the range, the IRS applies what it calls an “applicable percentage.” It compares how far your taxable income exceeds the threshold to the full width of the window. At the bottom, 100% of the potential deduction survives. At the top, none of it does. The reduction is gradual rather than a cliff.
What happens at the top of the range depends entirely on the kind of business producing the income.
Service Businesses Above the Threshold
The harshest treatment is reserved for a specified service trade or business. These are professional and service fields where the value comes primarily from the skills of the people doing the work: health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage, and investing or investment management. The statute also sweeps in any business whose principal asset is the reputation or skill of one or more employees or owners. Engineering and architecture are specifically excluded, so those professionals keep the deduction regardless of income.2Office of the Law Revision Counsel. 26 USC 199A – Qualified Business Income
Below the threshold, none of this matters. Once income enters the phase-out range, the deduction from a service business shrinks proportionally. Once income exceeds the top of the range ($276,750 for single filers or $553,500 for joint filers in 2026), the deduction on service-business income is gone.
Non-Service Businesses: The Wage and Property Cap
Businesses outside the restricted service list keep the deduction above the threshold, but only to the extent they show economic substance through employee wages or invested capital. The deduction on that income gets capped at the greater of:
- 50% of the W-2 wages the business paid during the year, or
- 25% of W-2 wages plus 2.5% of the unadjusted basis immediately after acquisition of qualified property
The second option exists for capital-intensive operations like manufacturing or real estate that may not run large payrolls but own significant depreciable property. The “unadjusted basis immediately after acquisition” is the asset’s original cost basis when placed in service, before depreciation.3eCFR. 26 CFR 1.199A-2 – Determination of W-2 Wages and Unadjusted Basis Immediately After Acquisition of Qualified Property
This cap phases in across the same window as the service-business restriction. Inside the range, only part of the cap applies. Above the range, it applies fully. A pass-through with no employees and no depreciable property would see its deduction drop to zero above the phase-out range, even though it is not a service business.
What “Taxable Income” Means for the Test
The income figure that gets compared against the thresholds is your taxable income before the Section 199A deduction itself. That means adjusted gross income minus your standard or itemized deductions. It is not gross income, and it is not AGI.
The distinction matters because deductions taken earlier on the return can pull you back under the threshold. Retirement plan contributions, timing of charitable donations, and bunching itemized deductions into a single year all reduce the taxable income used for the test. For a filer sitting just above the line, those moves can preserve the full 20%.
Net capital gains stay in taxable income for the threshold comparison, but they come out for the separate 20%-of-taxable-income cap on the deduction itself. If your taxable income minus net capital gains is smaller than your qualified business income, the 20% applies to that smaller number.2Office of the Law Revision Counsel. 26 USC 199A – Qualified Business Income
REIT Dividends and Publicly Traded Partnership Income
Qualified REIT dividends and publicly traded partnership income get their own 20% calculation and are not subject to the W-2 wage or property cap that applies to ordinary qualified business income. The threshold rules still reach PTP income if the partnership operates in one of the restricted service fields.4Internal Revenue Service. Qualified Business Income Deduction
Which Form You File
If your taxable income is at or below the threshold, you use Form 8995, the simplified version. Above the threshold, you must use Form 8995-A, which walks through the wage limitations, property calculations, and service-business phase-outs.1Internal Revenue Service. Instructions for Form 8995-A
Partners and S corporation shareholders depend on Schedule K-1 for the underlying numbers: each business’s allocable share of W-2 wages and the unadjusted basis of qualified property. Missing or wrong K-1 information is one of the most common reasons the deduction ends up miscalculated.5Internal Revenue Service. LB&I Training Tax Cuts and Jobs Act – Section 199A
A Tighter Penalty Rule for QBI Filers
Taxpayers claiming the Section 199A deduction sit under a tighter accuracy standard than other filers. The substantial understatement penalty normally triggers when a taxpayer understates tax by the greater of 10% or $5,000. For anyone claiming the QBI deduction, that trigger drops to the greater of 5% of the tax that should have been shown on the return or $5,000.6Internal Revenue Service. Accuracy-Related Penalty
The penalty itself is 20% of the underpayment. With phase-out math, wage and property calculations, and service-business classification all sitting inside one deduction, a moderate error can cross the 5% line faster than expected. Records of wages paid, property acquisition costs, and revenue broken out by category are the first line of defense.