What Is the QBI Deduction and Who Qualifies?

The QBI deduction lets owners of pass-through businesses deduct up to 20% of their qualified business income from federal taxable income. You qualify if you earn income from a domestic sole proprietorship, partnership, S corporation, or LLC taxed as one of those, or if you receive qualified REIT dividends or publicly traded partnership income. Below certain income thresholds, that’s essentially the whole test. Above them, the type of business you run and the wages and property it uses start to matter. The One Big Beautiful Bill Act made the deduction permanent and widened its phase-in ranges starting in 2026.

What Income Actually Qualifies

Qualified business income is the net profit from a domestic trade or business after related deductions. The income has to come from operations inside the United States and flow through to your individual return rather than being taxed at the corporate level.¹ Sole proprietorships, partnerships, S corporations, and LLCs taxed as any of those all fit. Certain trusts and estates with domestic business income qualify too. C corporations do not; their income is already taxed at the entity level.

Plenty of things that hit your return don’t count as QBI. Capital gains, dividends, and interest unrelated to the business are out. So is reasonable compensation you receive as an S corporation officer, and so are guaranteed payments from a partnership for services. The deduction rides on what the business earned from operations, not on what you pulled out of it.

If you’re self-employed, several deductions come out of QBI before the 20% is calculated: the deductible portion of self-employment tax, self-employed health insurance premiums, and contributions to retirement plans like a SEP-IRA or solo 401(k).² Maxing out a retirement contribution is still usually the right move, but each dollar in reduces your QBI deduction by roughly 20 cents.

One structural point worth knowing: the QBI deduction is below the line. It lowers your taxable income but not your adjusted gross income, so credits and benefits keyed to AGI aren’t affected. The deduction also can’t exceed 20% of your taxable income (before the QBI deduction) minus any net capital gain, including qualified dividends.³ That overall cap tends to bite only when capital gains make up a large share of income.

Do You Qualify at Your Income Level

Below certain thresholds, qualification is simple: if you have QBI, you get 20% of it, subject to the overall taxable-income cap. For 2026, the thresholds are $201,750 for single filers, $201,775 for married filing separately, and $403,500 for joint filers.⁴ Type of business doesn’t matter at this level, and neither do wages or property.

Once taxable income crosses the threshold, two limitations start phasing in. The One Big Beautiful Bill Act widened the phase-in ranges beginning in 2026 to $75,000 for single filers (up from $50,000) and $150,000 for joint filers (up from $100,000).⁵ The limitations fully apply at $276,750 for single filers and $553,500 for joint filers.⁴

Specified Service Trades or Businesses

The first limitation targets what the code calls specified service trades or businesses. That category covers health care, law, accounting, consulting, financial services, brokerage, performing arts, and athletics, along with any trade or business whose principal asset is the reputation or skill of its owners or employees.⁶ Engineering and architecture are pointedly not on the list, so those professionals follow the standard rules even at high incomes.

If you own an SSTB and your income sits inside the phase-in range, a shrinking percentage of your business income counts as eligible. Once you clear the top of the range ($276,750 single or $553,500 joint for 2026), the deduction disappears entirely. A surgeon or attorney earning above those amounts gets nothing from Section 199A. Non-service businesses stay eligible above the range, but their deduction is then governed by the wage and property tests.

The W-2 Wage and Property Tests

For any qualified business above the threshold, the deduction is capped at the greater of two figures:

50% of the W-2 wages the business paid to employees during the year, or
25% of W-2 wages plus 2.5% of the unadjusted basis of qualified property used in the business.

Whichever is larger is then compared to 20% of QBI from that business, and the deduction is the lesser of the two.¹ W-2 wages include all compensation on Form W-2, elective deferrals included. A sole proprietor with no employees has zero W-2 wages for this test, which zeroes out the wage-only calculation and makes the wage-plus-property alternative the only path.

Qualified property is tangible, depreciable property used in the business that hasn’t reached the end of its depreciable life or ten years after being placed in service, whichever is later. Unadjusted basis means original cost, not reduced for depreciation, Section 179 expensing, or bonus depreciation already claimed.⁷ A $500,000 building depreciated for six years still counts at $500,000 here.

Rental Real Estate

Rental income qualifies only if the rental activity is a trade or business. The IRS created a safe harbor under Revenue Procedure 2019-38 that treats a rental enterprise as a qualifying trade or business if 250 or more hours of rental services are performed for the property each year (by you, employees, or contractors) and you keep contemporaneous records of those hours.⁸ For rental enterprises at least four years old, the 250 hours needs to be met in any three of the five most recent tax years. Separate books and records are required for each enterprise, and triple-net leases don’t qualify for the safe harbor.

REIT Dividends and PTP Income

The deduction has a second component that runs on its own track. Qualified REIT dividends and qualified publicly traded partnership income get a flat 20% deduction, with no W-2 wage or property test.² If you hold REIT shares in a taxable brokerage account and receive ordinary dividends from them, this piece of the deduction is available even if you have no active business at all.

How to Claim It

The form you use depends on income. If your taxable income before the QBI deduction is at or below $201,750 (single) or $403,500 (joint) for 2026, and you’re not a patron of a specified agricultural cooperative, you file Form 8995, the short version.³ Everyone else files Form 8995-A, which carries the schedules for the wage and property limits and the SSTB phase-in.

Partners and S corporation shareholders will find the QBI figures they need on Schedule K-1 from the entity, including their share of W-2 wages and the unadjusted basis of qualified property. Sole proprietors pull the same information from their own books and depreciation schedules. The final deduction goes on Line 13a of Form 1040, with Form 8995 or 8995-A attached.⁹

A Tighter Penalty Standard

The IRS holds anyone claiming the Section 199A deduction to a stricter accuracy standard. The usual substantial-understatement penalty triggers at 10% of the tax that should have been shown (or $5,000, whichever is greater). For QBI claimants, that trigger drops to 5%.¹⁰ The penalty itself is 20% of the underpayment. Keep your W-2 wage documentation, property basis records, and depreciation schedules for at least three years after filing; if the deduction is questioned, those records are the defense.

1
Office of the Law Revision Counsel. 26 USC 199A – Qualified Business Income
2
Internal Revenue Service. Qualified Business Income Deduction
3
Internal Revenue Service. Instructions for Form 8995
4
Internal Revenue Service. Revenue Procedure 2025-32 – 2026 Inflation Adjusted Items
5
ACTEC Foundation. Qualified Business Income (QBI) Deductions Post-OBBBA
6
eCFR. 26 CFR 1.199A-5 – Specified Service Trades or Businesses
7
eCFR. 26 CFR 1.199A-2 – Determination of W-2 Wages and UBIA of Qualified Property
8
Internal Revenue Service. Revenue Procedure 2019-38 Safe Harbor for Rental Real Estate Enterprise
9
Internal Revenue Service. 2025 Instructions for Form 1040
10
Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments