Tax Deductions for U.S. Manufacturers: QBI Limits and OBBBA Changes

A U.S. manufacturer organized as a pass-through business can deduct up to 23 percent of its qualified business income under Internal Revenue Code Section 199A, a provision made permanent by the One Big Beautiful Bill Act starting in 2026. The QBI deduction for manufacturers is available to sole proprietorships, partnerships, S corporations, and qualifying trusts or estates that produce goods domestically, and it comes with a built-in advantage over many service industries: even at high income levels, manufacturers never lose the deduction outright.¹

Who Qualifies

Section 199A is available only to taxpayers other than corporations.² For manufacturers, that means sole proprietorships, partnerships, S corporations, and qualifying trusts or estates. Income flows through to the owners or beneficiaries, who claim the deduction on their personal returns.¹

If your manufacturing business is a C corporation, you cannot claim this deduction at all. When a trust or estate runs a manufacturing operation, the deduction is split among beneficiaries in proportion to the income each one receives.

Why Manufacturers Get Better Treatment Than Service Businesses

Section 199A treats certain service-heavy businesses less favorably than manufacturing operations. Law, accounting, health care, financial services, consulting, and athletics are classified as specified service trades or businesses, and above the income thresholds their deduction phases down and eventually disappears.³

Manufacturing is not a specified service trade or business. The regulations explicitly note that activities like manufacturing pharmaceuticals and medical devices are not health-care services, even though the finished product ends up in the health-care market.³ A high-income manufacturer can still claim the deduction at any income level. The only question is which formula applies.

2026 Income Thresholds and Phase-In

If your taxable income before the QBI deduction is at or below the lower threshold — $201,750 for single filers or $403,500 for joint filers in 2026 — you simply deduct 23 percent of your qualified business income. No wage or property calculations required. These thresholds are adjusted annually for inflation.

Once your income exceeds the lower threshold, restrictions phase in over a range of $75,000 for single filers and $150,000 for joint filers. Within that range, the deduction gradually shifts from the flat 23 percent calculation toward the wage-and-property formula. By the time your taxable income reaches the upper threshold ($276,750 single or $553,500 joint), the wage and property limits apply in full.

Separately, your total QBI deduction cannot exceed 23 percent of taxable income minus any net capital gain. Most manufacturers won’t hit this overall cap, but a large asset sale in a given year can push it into play.²

The W-2 Wage and Qualified Property Formula

For manufacturers with taxable income above the upper threshold, the deduction for each business is limited to the greater of two calculations:²

50 percent of 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 of all qualified property.

Your final deduction is the lesser of 23 percent of QBI or whichever option above produces the larger number. Capital-intensive manufacturers with expensive equipment and a lean workforce often do better under the second option because it credits investment in machinery and facilities. A labor-heavy operation with a large payroll and modest equipment usually does better under the first.

W-2 wages for this calculation include all wages reported to the Social Security Administration plus elective deferrals to plans like 401(k)s, Section 457 deferred compensation, and designated Roth contributions.⁴ To count, wages must be properly reported on returns filed with the SSA within 60 days after the filing deadline. Amounts paid to statutory employees are excluded.

What Counts as Qualified Property

Qualified property is tangible, depreciable property that your manufacturing business holds and uses to produce income at the close of the tax year. Factory buildings, production machinery, forklifts, molds, and specialized tools all qualify, provided they are still within their depreciable period.²

The depreciable period begins when you first place the asset in service and ends on the later of the tenth anniversary of that date or the last day of the asset’s recovery period under normal depreciation rules.⁵ A production machine with a seven-year recovery period stays qualified property for 10 years after it is placed in service. A commercial building with a 39-year recovery period stays in the calculation for the full 39. The basis used in the 2.5 percent formula is the original acquisition cost, not the depreciated value, so the property keeps contributing at its full purchase price until the depreciable period ends.

Aggregating Multiple Manufacturing Operations

Manufacturers who run several related businesses through separate entities can elect to aggregate them for QBI purposes. Aggregation pools the W-2 wages and qualified property of multiple businesses, which can produce a larger deduction when one entity has high QBI but low wages and another has the opposite profile.

To aggregate, all five criteria in the Treasury Regulations must be met:⁶

The same person or group owns at least 50 percent of each business, directly or by attribution.
That ownership exists for a majority of the tax year, including the last day.
All businesses use the same taxable year.
None of the aggregated businesses is a specified service trade or business.
The businesses share at least two of three operational characteristics: the same or complementary products, shared facilities or centralized functions like purchasing or IT, or coordinated operations through supply-chain or operational ties.

A manufacturer that owns both a production facility and a separate distribution company under common ownership, sharing warehouse space and administrative staff, would likely satisfy these criteria. Once you elect to aggregate, you must report the grouping on Form 8995-A and keep it consistent in future years.⁷

What Happens in a Loss Year

If your total qualified business income across all pass-through businesses is negative for the year, there is no QBI deduction that year. The net loss carries forward to the following tax year as a qualified business loss and reduces your positive QBI before the next year’s deduction is calculated.²

If you own multiple businesses, losses first net against gains. Only if the combined result is negative does a carryforward arise. A bad year doesn’t erase the deduction permanently; it defers it. Qualified REIT dividends and publicly traded partnership income are calculated separately and can still generate a deduction even when your business QBI is negative.

How to Calculate and Claim the Deduction

Your qualified business income is the net income from your manufacturing trade or business: revenue minus ordinary business expenses. It does not include capital gains, investment interest, dividend income, or other items not tied to the business itself.¹ Sole proprietors pull QBI from Schedule C. Partners and S corporation shareholders get their QBI figures on Schedule K-1 from the entity.

Which form you file depends on income. If your taxable income before the QBI deduction is at or below $201,750 (single) or $403,500 (joint), use Form 8995, the simplified computation. Above those thresholds, or if you aggregate businesses or have specified service business income, use Form 8995-A, which handles the wage and property limits and phase-out math.⁷ A carried-forward QBI loss goes on Line 3 of Form 8995 or Schedule C of Form 8995-A.

The final deduction from either form goes on Line 13a of Form 1040 or Form 1040-SR.⁷ It reduces taxable income directly, and you can take it whether you itemize or claim the standard deduction.

Records and Penalty Exposure

Claiming the deduction requires records that clearly separate manufacturing income from investment income, document W-2 wages paid, and establish the original cost of all depreciable property. Purchase agreements, depreciation schedules, payroll records, and filed W-2 forms with the Social Security Administration are the core documents. The IRS generally requires taxpayers to keep records supporting a return for at least three years from the filing date.

The accuracy-related penalty for QBI deduction errors is 20 percent of the underpayment attributable to the mistake. Taxpayers claiming a Section 199A deduction face a lower trigger for a “substantial understatement.” For most taxpayers, a substantial understatement means the shortfall exceeds the greater of 10 percent of the correct tax or $5,000. For Section 199A claimants, that percentage drops to 5 percent, so a smaller error can trigger the penalty.⁸ The wage and property calculations are where most claims fall apart, so those figures deserve extra scrutiny.

What Changed Under the One Big Beautiful Bill Act

Section 199A was originally set to expire after the 2025 tax year. The One Big Beautiful Bill Act, signed into law in 2025, eliminated the sunset and made the deduction permanent. It also made several substantive changes that affect manufacturers starting in 2026:

The deduction rate rises from 20 percent to 23 percent of qualified business income.
The phase-in range for wage and property limits widens from $50,000 to $75,000 for single filers and from $100,000 to $150,000 for joint filers, and both ranges are indexed for inflation going forward.
If your combined QBI from all actively operated businesses is at least $1,000 and you materially participate, you receive a minimum deduction of $400, even when the standard calculation would produce less. This floor is indexed for inflation after 2026.

The core structure — pass-through entities only, the W-2 wage and qualified property formula, and the SSTB restrictions — is unchanged. Manufacturers who benefited before will see a modestly larger deduction, and those inside the phase-in range gain more room before the full limits apply.

1
Internal Revenue Service. Qualified Business Income Deduction
2
Office of the Law Revision Counsel. 26 USC 199A – Qualified Business Income
3
eCFR. 26 CFR 1.199A-5 – Specified Service Trades or Businesses and the Trade or Business of Performing Services as an Employee
4
Internal Revenue Service. Revenue Procedure 2019-11
5
Cornell Law Institute. Qualified Property from 26 USC 199A(b)(6)
6
eCFR. 26 CFR 1.199A-4 – Aggregation
7
Internal Revenue Service. Instructions for Form 8995
8
Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments