Taxable Income Limits: Section 179, QBI, 163(j) & Depletion

Five major federal business deductions are capped by your taxable income: Section 179 equipment expensing, the Section 199A pass-through deduction, the Section 163(j) business interest deduction, the Section 250 deduction for foreign-derived and GILTI income, and percentage depletion for natural resources. These taxable income limits on business deductions exist so a write-off can offset your profits but generally can’t create or deepen a net operating loss. The consequence of hitting the ceiling is not the same across the five. Section 179, Section 163(j), and the 65% depletion cap let you carry the disallowed amount forward. Section 250 does not. The QBI cap simply shrinks the current-year deduction.

Section 179 Equipment Expensing

Section 179 lets you deduct the full cost of qualifying equipment and property in the year you place it in service instead of depreciating it over several years. For 2026, the dollar cap is $2,560,000, phasing down once qualifying property placed in service exceeds $4,090,000 and disappearing at $6,650,000.¹

The taxable income limit sits on top of the dollar cap. Your Section 179 deduction cannot exceed the total taxable income you earned from actively conducting any trade or business during the year.² Active conduct means meaningful involvement in managing or operating the business. Passive investors don’t qualify.

The income figure is broader than most people expect. It includes W-2 wages and salary from a regular job, not just self-employment profits.³ Someone running a side business that barely breaks even, while earning $80,000 as an employee, counts that salary toward the Section 179 income ceiling. When calculating the limit, you ignore the Section 179 deduction itself, the self-employment tax deduction, and any net operating loss deduction.

Any amount disallowed by the income cap carries forward indefinitely. If your business earns $50,000 and you bought $75,000 of qualifying equipment, you deduct $50,000 this year and carry the remaining $25,000 to next year, where it faces the same income test.² Carryforwards are tracked on Form 4562.

The Pass-Through Deduction (Section 199A)

Owners of sole proprietorships, partnerships, S corporations, and certain trusts can deduct up to 20% of their qualified business income. The One Big Beautiful Bill Act made this deduction permanent.⁴ It reduces taxable income but not adjusted gross income, and it’s available whether you itemize or take the standard deduction.

Your actual deduction is the lesser of your combined QBI amount or 20% of your taxable income minus net capital gains.⁵ Capital gains are excluded from that figure because they already enjoy lower rates, and letting the 20% write-off apply to them would stack two benefits on the same income. Unlike Section 179, there is no carryforward for the amount you lose to this ceiling. It simply reduces this year’s deduction.

One planning consequence follows directly. Above-the-line adjustments that lower your taxable income, such as larger retirement contributions or charitable giving, can also lower the QBI ceiling and unexpectedly shrink the pass-through deduction. The moving parts are worth working through before year-end.

Wage and Property Limits Above the Income Threshold

For 2026, once taxable income exceeds $201,750 (single) or $403,500 (married filing jointly), an additional layer of restrictions phases in. Above these thresholds, the deduction for each business is further capped at the greater of:

50% of W-2 wages paid by the business, or
25% of W-2 wages plus 2.5% of the unadjusted basis of the business’s depreciable property.⁵

These limits phase in fully at $276,750 for single filers and $553,500 for joint filers.¹ A solo consultant with strong income, no employees, and little depreciable property can watch the deduction shrink to zero above the phase-in range.

Specified Service Businesses

Businesses in health, law, accounting, consulting, financial services, performing arts, athletics, or any field where the principal asset is the reputation or skill of its owners are classified as specified service trades or businesses.⁶ Below the income thresholds the classification does not matter. Above the phase-in range, specified service businesses get no deduction at all.

Business Interest Expense (Section 163(j))

Businesses that borrow face their own income-based ceiling on interest deductions. The annual deduction for business interest expense cannot exceed the sum of business interest income, 30% of adjusted taxable income, and any floor plan financing interest (a carve-out mainly for auto dealers).⁷

The definition of adjusted taxable income drives the result. For tax years 2022 through 2024, depreciation, amortization, and depletion were not added back, and the 30% cap bit harder. The One Big Beautiful Bill Act reversed that for tax years beginning after 2024, so for 2026 those deductions are again added back before applying the 30% limit.⁸ Capital-intensive businesses get meaningfully more room.

Small businesses are fully exempt. If average annual gross receipts over the prior three years are $31 million or less (adjusted for inflation), the 30% cap does not apply.⁸ Business interest disallowed by the cap carries forward and is treated as interest paid in the following year, where it faces the same limit again.⁷

Section 250: Foreign-Derived Income and GILTI

Domestic corporations with foreign operations can deduct a percentage of foreign-derived deduction eligible income (broadly, export-related profits from intangible property) and of income included under the global intangible low-taxed income rules. For 2026, the deduction is 33.34% for foreign-derived income and 40% for GILTI inclusions.⁹ The One Big Beautiful Bill Act set these rates in place of the changes that were scheduled under the TCJA.

The income limit here is the harshest of the five. If the combined income base exceeds the corporation’s taxable income for the year (calculated without the Section 250 deduction itself), the income base is reduced proportionally until the deductions fit.⁹ The statute provides no carryforward. Whatever is lost to this cap is gone permanently. Maintaining positive domestic taxable income, and paying attention to the timing of expenditures and revenue recognition around year-end, directly affects how much of this deduction survives.

Percentage Depletion

Businesses extracting minerals, oil, gas, or other natural resources can claim percentage depletion, calculated as a fixed percentage of gross income from the property. Two layered income ceilings apply.

The first is property-level. The deduction for any given site cannot exceed 50% of the taxable income from that property, calculated before depletion and before the pass-through deduction.¹⁰ Oil and gas properties get a more generous version of this test at 100% of the property’s taxable income, so the deduction can wipe out all profit from that well.

The second is entity-level. Total percentage depletion across all your oil and gas properties cannot exceed 65% of taxable income from all sources for the year.¹¹ For this 65% test, taxable income is computed without regard to the depletion deduction itself, the pass-through deduction, net operating loss carrybacks, and capital loss carrybacks. Any amount disallowed by the 65% ceiling carries forward to the following year and faces the same limitation again.

A producer running multiple wells can pass the property-level test on every well and still get clipped by the entity-level 65% cap if depletion across the portfolio is large relative to total income.

How These Limits Interact With Net Operating Losses

Net operating losses have their own income-based ceiling. For losses arising after 2017, the NOL deduction cannot offset more than 80% of taxable income in the carryforward year. That taxable income figure is calculated without regard to the NOL deduction itself, the pass-through deduction, and the Section 250 deduction.¹²

Ordering matters. The Section 179 income limit is computed without regard to any NOL deduction, so Section 179 comes first.³ The pass-through deduction uses your final taxable income figure, so an NOL carryforward that reduces taxable income also reduces the available QBI deduction. Getting the sequence wrong can cost real money when large prior-year carryforwards collide with newly profitable operations.

One last practical point. Most states do not fully conform to these federal provisions. Several impose lower Section 179 caps, and a number require the pass-through deduction to be added back to state taxable income entirely. Check your state’s conformity rules before assuming a federal deduction flows through to your state return.

1
Internal Revenue Service. Revenue Procedure 2025-32
2
Office of the Law Revision Counsel. 26 USC 179 – Election to Expense Certain Depreciable Business Assets
3
Internal Revenue Service. Instructions for Form 4562
4
Internal Revenue Service. Qualified Business Income Deduction
5
Office of the Law Revision Counsel. 26 USC 199A – Qualified Business Income
6
eCFR. 26 CFR 1.199A-5 – Specified Service Trades or Businesses and the Trade or Business of Performing Services as an Employee
7
Office of the Law Revision Counsel. 26 USC 163 – Interest
8
Internal Revenue Service. Questions and Answers About the Limitation on the Deduction for Business Interest Expense
9
Office of the Law Revision Counsel. 26 USC 250 – Foreign-Derived Deduction Eligible Income and Net CFC Tested Income
10
Office of the Law Revision Counsel. 26 USC 613 – Percentage Depletion
11
Office of the Law Revision Counsel. 26 USC 613A – Limitations on Percentage Depletion in Case of Oil and Gas Wells
12
Internal Revenue Service. Instructions for Form 172