What Is the Qualified Business Income (QBI) Deduction?

The qualified business income deduction lets owners of pass-through businesses deduct up to 20 percent of their business profits from taxable income. Created by Section 199A of the tax code, it was originally set to expire after 2025 and was made permanent by the One, Big, Beautiful Bill Act signed into law on July 4, 2025.¹ For 2026, the full deduction is available to single filers with taxable income below $201,750 and joint filers below $403,500. Above those figures, additional limits phase in.²

Who Qualifies

The deduction is available to individuals, trusts, and estates that earn income through a pass-through business: sole proprietorships, partnerships, LLCs, and S corporations. In each of these, business profits flow through to the owner’s personal tax return rather than being taxed at the entity level.³ The business itself does not claim the deduction. It passes the relevant income data to its owners, who take the deduction on their individual Form 1040.⁴

Two types of income are excluded outright. C corporation profits do not qualify because they are already taxed at the corporate level. Wages you earn as a W-2 employee also do not qualify, even when you work for a pass-through business. You can take the deduction whether you use the standard deduction or itemize, so no Schedule A is required.³

What Counts as Qualified Business Income

Qualified business income is the net profit from a domestic trade or business after ordinary business expenses. Only income effectively connected with operations inside the United States counts.⁵ Several items are excluded even when they appear on the same return:

Short-term and long-term capital gains and losses.
Dividends and interest income that are not generated in the ordinary course of business.
Reasonable compensation paid to an S corporation shareholder-employee, which keeps owners from relabeling salary as deductible profit.
Guaranteed payments a partnership makes to a partner for services or capital use.

The exclusions keep the deduction focused on actual operating profit rather than investment returns or disguised compensation.⁵

2026 Income Thresholds and Phase-Out Ranges

Taxable income drives how the deduction works. Below the thresholds you generally take the full 20 percent. Inside the phase-out range, additional limits gradually apply. Above the top of the range, those limits apply in full, and for certain service businesses the deduction disappears entirely. Taxable income for this purpose is measured before subtracting the QBI deduction itself.

For 2026, the IRS has set these figures:²

Married filing jointly: full deduction below $403,500; phase-out from $403,500 to $553,500.
Single, head of household, and other filers: full deduction below $201,750; phase-out from $201,750 to $276,750.
Married filing separately: full deduction below $201,775; phase-out from $201,775 to $276,775.

How the Deduction Is Calculated

At its simplest, the deduction equals 20 percent of your qualified business income. The amount you actually deduct is the lesser of two figures:⁵

Your combined QBI amount: the sum of the deductible amounts from each of your qualified businesses, at 20 percent of each business’s QBI, subject to any applicable limits.
The income cap: 20 percent of your taxable income minus any net capital gain.

If your taxable income sits below the threshold for your filing status, you take 20 percent of QBI, compare it to the income cap, and deduct whichever is smaller. Nothing else is required.

W-2 Wage and Capital Limits for Higher Earners

Once your taxable income crosses the threshold, an additional limit applies to each qualifying business. The deduction for that business cannot exceed the greater of:⁵

50 percent of the W-2 wages paid by that business, or
25 percent of the W-2 wages paid by that business plus 2.5 percent of the unadjusted basis immediately after acquisition (UBIA) of its qualified property.

W-2 wages include all compensation reported on Forms W-2 that is subject to federal income tax withholding, including employee 401(k) contributions. UBIA is the original purchase price of tangible, depreciable business assets such as equipment, machinery, or buildings. Property counts toward UBIA only while it remains within its depreciable period, which is the later of ten years after being placed in service or the end of its regular depreciation recovery period.

Inside the phase-out range, the W-2/UBIA limit is applied proportionally. At the bottom of the range it barely bites; at the top it applies in full. Businesses that pay significant wages or own substantial depreciable property tend to produce a larger deduction than those built mainly on the owner’s expertise with few employees or assets.

Specified Service Trades or Businesses

Certain professional fields face stricter treatment. These are called specified service trades or businesses, or SSTBs, and they cover work whose primary value comes from the skill or reputation of the people performing it. The statute names these fields:⁵

Health care
Law
Accounting
Actuarial science
Performing arts
Consulting
Athletics
Financial services, brokerage, investing, and investment management

Engineering and architecture are excluded from the SSTB definition. The statute specifically carves them out, so engineering and architecture firms can claim the full deduction regardless of income.⁵

If your taxable income is below the threshold for your filing status, SSTB status does not matter. You get the standard 20 percent deduction. Within the phase-out range, the SSTB deduction shrinks proportionally. Once your income passes the top of the range ($276,750 for most filers or $553,500 for joint filers in 2026), the deduction for an SSTB disappears entirely.²

REIT Dividends and Publicly Traded Partnership Income

You do not have to own the business yourself to benefit from Section 199A. Qualified dividends from real estate investment trusts and qualified income from publicly traded partnerships each receive their own 20 percent deduction.⁴ These amounts are calculated separately and are not subject to the W-2 wage or UBIA limits that apply to trade-or-business QBI.⁶ The overall deduction still cannot exceed 20 percent of taxable income minus net capital gain.

Rental Real Estate

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 qualifying if you meet these requirements each year:⁷

At least 250 hours of rental services per year performed by you, employees, agents, or contractors. Advertising vacancies, negotiating leases, collecting rent, and handling maintenance count. Arranging financing or reviewing financial statements does not.
Separate books and records for the rental enterprise.
Contemporaneous time logs showing what services were performed, by whom, on what dates, and for how many hours.
A safe harbor statement attached to a timely filed return each year you rely on it.

For enterprises in existence at least four years, the 250-hour test must be met in three of the five most recent tax years rather than every year. Some property is excluded from the safe harbor entirely: your personal residence, property under a triple-net lease, and property rented to a commonly controlled business.

Which Form to File

Two IRS forms handle the deduction, and the choice depends on income and business type. If your taxable income before the QBI deduction is at or below $201,750 ($403,500 for joint filers) and you are not a patron of an agricultural or horticultural cooperative, you file Form 8995. It is a one-page computation.⁸

If your income is higher, or you are a cooperative patron, you file Form 8995-A instead. This longer form includes schedules for the W-2 wage and UBIA calculations, SSTB phase-out computations, loss netting and carryforwards, and business aggregation elections. Owners of an SSTB whose income falls inside the phase-out range must complete Schedule A of Form 8995-A to calculate the reduced deduction.⁸ The final amount from either form goes onto your Form 1040 as a reduction to taxable income.⁴

A Stricter Accuracy Standard

Taxpayers who claim the QBI deduction face a tighter accuracy rule. A substantial understatement of income tax is normally defined as the greater of 10 percent of the tax owed or $5,000. For anyone claiming Section 199A, that 10 percent figure drops to 5 percent.⁹ The penalty for a substantial understatement is 20 percent of the underpaid amount. Because the calculation gets complicated fast for higher-income filers, SSTB owners, and anyone aggregating businesses, detailed records and a qualified preparer are worth the cost of admission.

1
Internal Revenue Service. One, Big, Beautiful Bill Act – Tax Deductions for Working Americans and Seniors
2
Internal Revenue Service. Revenue Procedure 2025-32
3
Internal Revenue Service. Qualified Business Income Deduction
4
Internal Revenue Service. Instructions for Form 8995 (2025)
5
Office of the Law Revision Counsel. 26 USC 199A – Qualified Business Income
6
eCFR. 26 CFR 1.199A-3 – Qualified Business Income, Qualified REIT Dividends, and Qualified PTP Income
7
Internal Revenue Service. Revenue Procedure 2019-38 – Safe Harbor for Rental Real Estate Enterprise
8
Internal Revenue Service. Instructions for Form 8995-A
9
Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments