What Is Qualified Business Income? Definition, Rules, and Deduction

Qualified business income is the net profit from a domestic trade or business that flows through to an individual owner, and Section 199A of the Internal Revenue Code lets eligible taxpayers deduct up to 20 percent of that amount from their federal taxable income.¹ The One Big Beautiful Bill Act, signed on July 4, 2025, made the deduction permanent and widened the income ranges over which its limits phase in. What the number actually includes, what it excludes, and how much of it you can deduct depend on the type of business, your total income, and how much the business pays in wages.

How QBI Is Defined

QBI is the net amount of income, gains, deductions, and losses from a qualified trade or business.¹ You total the revenue the business earned, subtract the related expenses and losses, and the resulting profit (or loss) is what feeds the Section 199A calculation.

Two conditions frame everything else. The activity must be carried on within the United States; income from foreign operations does not count.¹ And the activity must be regular, continuous, and conducted primarily for profit. A casual hobby that occasionally earns money is not a qualified business.

Which Businesses Generate QBI

Only pass-through businesses generate QBI. C corporations are excluded because they pay their own federal income tax rather than passing profits to owners.² The eligible structures are:

Sole proprietorships, with business income reported on Schedule C of the owner’s individual return.
Partnerships, whose income passes to individual partners on Schedule K-1.
S corporations, whose profits flow to shareholders without a corporate-level federal income tax.
Limited liability companies, taxed as one of the above depending on their election.

Trusts and estates that receive pass-through income can claim a proportionate share of the deduction.³ Wages earned as someone’s employee never qualify; the statute specifically excludes the trade or business of performing services as an employee.⁴

Income That Counts Toward QBI

The core of QBI is operating profit: what is left after paying for overhead, supplies, payroll, and other ordinary expenses. Revenue from selling inventory, providing services, and similar day-to-day activities all count so long as the work happens within the United States.¹

Ordinary Gains on Business Property

When you sell property that was used in your business for more than a year (often called Section 1231 property), the gain is included in QBI only if it is treated as ordinary income rather than capital gain.⁵ Depreciation recapture under Sections 1245 and 1250 (the portion of gain representing prior depreciation deductions) is generally treated as ordinary income and is therefore included.⁶ Any portion treated as long-term capital gain is excluded.

Rental Real Estate That Rises to a Trade or Business

Rental income qualifies only if the rental activity rises to the level of a trade or business. The IRS offers a safe harbor that treats a rental real estate enterprise as a qualified business when the owner meets specific requirements:⁷

At least 250 hours of rental services per year. For enterprises less than four years old, the 250-hour threshold applies every year; for older enterprises, it must be met in at least three of the past five years.
Separate books and records for each rental enterprise.
Contemporaneous time logs recording the dates, hours, descriptions, and names of people performing rental services.

A rental activity that does not meet the safe harbor can still qualify if it independently satisfies the general trade-or-business standard.¹

Income That Does Not Count

Several categories are specifically excluded from QBI even when they flow through a business entity.

Investment Income

Capital gains and losses (short-term and long-term), dividends, and interest income do not count toward QBI.¹ The one exception for interest is when it is directly tied to the business itself, such as interest earned on trade receivables. Passive investment returns unrelated to operations do not get the 20 percent break.

The Owner’s Own Compensation

If you are a shareholder-employee of an S corporation, the reasonable compensation you pay yourself as wages is excluded from QBI. That salary is subject to payroll taxes and does not receive the deduction; only the remaining profit distributed to you as a shareholder counts. Partners similarly cannot include guaranteed payments for services in their QBI calculation.¹

REIT Dividends and Publicly Traded Partnership Income

Qualified dividends from real estate investment trusts and income from publicly traded partnerships are handled separately from standard QBI. They receive their own 20 percent deduction, which is not subject to the wage-and-property limitation that applies to ordinary QBI.¹

How Much of Your QBI You Can Actually Deduct

Having QBI is only the first step. The size of the deduction depends on your total taxable income, whether your business is a specified service trade or business, and, above certain income levels, how much the business pays in wages and holds in depreciable property.

Below the Income Threshold: The Full 20 Percent

If your taxable income stays below the threshold, you receive the full 20 percent deduction on your QBI without further limitation. For 2026, that threshold is approximately $201,750 for single filers and $403,500 for those married filing jointly.

Above the Threshold: The W-2 Wage and Property Limit

Once taxable income exceeds the threshold, the deduction for each business is capped at the greater of:⁴

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 (UBIA) of qualified property held by the business.

A business that pays little in wages and holds minimal depreciable property can see its deduction shrink sharply after the owner crosses the threshold. The limit phases in over a $75,000 range for single filers and a $150,000 range for joint filers rather than snapping on all at once.⁸ Those ranges were widened by the One Big Beautiful Bill Act from the prior $50,000 and $100,000. Qualified property means tangible, depreciable business assets such as equipment, machinery, and buildings, and the unadjusted basis is the original cost when placed in service, not the depreciated value.

The Overall Taxable Income Cap

Regardless of how large QBI is, the total Section 199A deduction cannot exceed 20 percent of your taxable income (calculated before the QBI deduction itself) minus any net capital gain, which for this purpose includes qualified dividends.⁴ The deduction can never exceed 20 percent of your non-investment income even if business profits would otherwise support a larger figure.

Specified Service Trades or Businesses

Certain professions face an extra restriction. A specified service trade or business (SSTB) is one whose value comes primarily from the expertise of the people performing the work. The statute lists:⁴

Health, law, and accounting.
Actuarial science and performing arts.
Consulting and athletics.
Financial services, brokerage, and investment management.
Any business whose principal asset is the reputation or skill of one or more employees or owners.

Engineering and architecture are not on the list. Professionals in those fields are treated like manufacturers or retailers for this deduction.

Below the income threshold, an SSTB gets the full deduction just like any other business. Between the threshold and the ceiling ($276,750 single / $553,500 joint for 2026), only a declining share of the SSTB’s income, wages, and property counts. Above the ceiling, none of the SSTB’s income qualifies.⁴ Non-SSTBs above the ceiling still get a deduction, subject to the wage-and-property limit.

A business is not labeled an SSTB just because a small slice of its revenue comes from a restricted field. If the business has $25 million or less in gross receipts, it avoids SSTB classification as long as less than 10 percent of its revenue comes from the specified service activity; above $25 million in gross receipts, the threshold drops to 5 percent.⁹

Negative QBI Carries Forward

If your combined QBI across all businesses is a net loss for the year, your deduction that year is zero. The loss carries forward and reduces QBI available for the deduction in the next tax year.⁸ The carryforward continues indefinitely until it is fully offset by positive QBI. Only the loss carries over; W-2 wages and property basis from the loss year do not.

The $400 Minimum Deduction

Beginning in 2026, a new floor applies. If your QBI from a business is at least $1,000 and you materially participate in the business, you are guaranteed a minimum deduction of $400 even when the standard calculation would produce less. Both figures will be adjusted for inflation.

Where the Deduction Is Reported

If your taxable income is at or below the threshold and no SSTB issues apply, the deduction is calculated on Form 8995.³ If your income is above the threshold, you operate an SSTB, or you are aggregating businesses, you use the longer Form 8995-A.⁵ The result reduces taxable income directly on Form 1040, and you do not have to itemize to claim it.

1
Internal Revenue Service. Qualified Business Income Deduction
2
Office of the Law Revision Counsel. 26 USC 199A – Qualified Business Income
3
Internal Revenue Service. Instructions for Form 8995 (2025)
4
Office of the Law Revision Counsel. 26 US Code 199A – Qualified Business Income
5
Internal Revenue Service. Instructions for Form 8995-A
6
Federal Register. Qualified Business Income Deduction
7
Internal Revenue Service. IRS Finalizes Safe Harbor to Allow Rental Real Estate to Qualify as a Business for Qualified Business Income Deduction
8
eCFR. 26 CFR 1.199A-1 – Operational Rules
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eCFR. 26 CFR 1.199A-5 – Specified Service Trades or Businesses