The QBI deduction phase-out thresholds for 2026 begin at $201,750 of taxable income for single filers and $403,500 for married couples filing jointly. Above those figures the 20% deduction shrinks across a $75,000 range for single filers and a $150,000 range for joint filers. Owners of specified service businesses lose the deduction entirely at $276,750 (single) or $553,500 (joint). Owners of other businesses keep a deduction above those ceilings, but only to the extent their W-2 wages and qualified property support it.
2026 Phase-Out Thresholds by Filing Status
The IRS adjusts the Section 199A thresholds each year for inflation. For tax years beginning in 2026, the numbers where limitations start and where they apply in full are:1Internal Revenue Service. Revenue Procedure 2025-32
- Married filing jointly: phase-out begins at $403,500 and completes at $553,500.
- Single and head of household: phase-out begins at $201,750 and completes at $276,750.
- Married filing separately: phase-out begins at $201,775 and completes at $276,775.
Those figures refer to your total taxable income on Form 1040 before the QBI deduction, not your business profit alone. Wages, interest, capital gains, and any other income all count toward the threshold. If your taxable income stays at or below the starting number for your filing status, you receive the full 20% deduction with no limitations applied.
The phase-out windows are wider starting in 2026 than they were before. Through 2025 the range was $50,000 for single filers and $100,000 for joint filers. The law made the deduction permanent and expanded those windows to $75,000 and $150,000, giving more room before limitations bite.
What Happens Inside the Range for Service Businesses
The harshest treatment falls on owners of a specified service trade or business, or SSTB. That category covers businesses whose principal asset is the skill or reputation of their owners or employees, including health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, and brokerage services. Engineering and architecture are specifically excluded.2eCFR. 26 CFR 1.199A-5 – Specified Service Trades or Businesses and the Trade or Business of Performing Services as an Employee
Once an SSTB owner’s taxable income enters the phase-out range, the allowable deduction shrinks proportionally with how far into the range you are. A single filer at roughly the midpoint of the $201,750–$276,750 window would see the deduction cut by about half. At the top of the range, the deduction is zero. Joint filers face the same proportional math across the wider $403,500–$553,500 window.1Internal Revenue Service. Revenue Procedure 2025-32
There is no workaround above the ceiling. Hiring more employees, buying more equipment, or restructuring the payroll does not restore the deduction for an SSTB owner whose taxable income exceeds the top of the phase-out range. If you operate more than one SSTB, the reduction applies to each separately.
The De Minimis Rule for Mixed Businesses
Some businesses generate a small amount of service revenue but are not primarily service businesses. A de minimis rule can keep them out of SSTB status. A business with $25 million or less in gross receipts avoids SSTB classification as long as less than 10% of its revenue comes from services in a restricted field. Above $25 million in gross receipts, that ceiling drops to 5%.2eCFR. 26 CFR 1.199A-5 – Specified Service Trades or Businesses and the Trade or Business of Performing Services as an Employee
Cross the applicable percentage and the whole business is treated as an SSTB, not just the service portion. Tracking revenue by activity matters, and separating service lines into a distinct entity can sometimes preserve the deduction for the non-service side.
What Happens Inside the Range for Non-Service Businesses
Non-SSTB owners do not lose the deduction outright when they cross the threshold. Instead they face a cap tied to what the business pays in wages and what it owns in depreciable property. The deduction is limited to the greater of:3Internal Revenue Service. Tax Cuts and Jobs Act: A Comparison for Businesses
- 50% of W-2 wages paid by the business, or
- 25% of W-2 wages plus 2.5% of the unadjusted basis immediately after acquisition (UBIA) of qualified property held by the business.
This cap phases in across the same $75,000 or $150,000 window. Below the starting threshold it does not apply. At the top of the range it applies in full. A non-service business with no employees and no significant depreciable property can see its deduction shrink to zero even though it is not an SSTB.
Only tangible depreciable assets count for the 2.5% property component. Land, inventory, and intangibles are excluded. The asset must be held by and used in the business at year end, and it uses the original purchase price before any depreciation.4Internal Revenue Service. Instructions for Form 8995-A (2025)
Managing the Phase-Out
Two levers change the arithmetic if you are near or inside the range. The first is reasonable compensation for S corporation owners. Wages paid to yourself as an officer count toward the 50% W-2 wage cap, which helps you above the threshold, but those same wages are excluded from QBI itself, which lowers the income the 20% is applied to.5Internal Revenue Service. Qualified Business Income Deduction The right number depends on where you sit in the phase-out.
The second is aggregation. If you own more than one business, each is treated separately by default, but you can elect to combine them into a single unit and pool their W-2 wages and UBIA for purposes of the cap. To qualify, all of the following must hold:6Internal Revenue Service. Instructions for Form 8995 (2025)
- The same person or group owns at least 50% of each business for most of the tax year, including the last day.
- None of the aggregated businesses is an SSTB.
- The businesses share at least two of: similar products or services, shared facilities, or centralized functions such as accounting, purchasing, or HR.
Aggregation helps most when one entity produces the income and another employs the workers or holds the property. Once you elect, you must aggregate the same way in future years unless the underlying facts change.
Filing Above the Threshold and Penalty Risk
Which form you use depends on where your taxable income falls. At or below the starting threshold for your filing status, you use the simplified Form 8995. Above the threshold, or if you are a patron of an agricultural or horticultural cooperative, you use Form 8995-A with its supporting schedules.4Internal Revenue Service. Instructions for Form 8995-A (2025)
The QBI deduction also carries a lower penalty threshold than most items on your return. Ordinarily the accuracy-related penalty applies when a tax understatement exceeds the greater of 10% of the tax owed or $5,000. If you claim any Section 199A deduction, that 10% figure drops to 5%, so a smaller error can trigger a 20% penalty on the underpayment.7Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments Keeping careful records of W-2 wages, asset acquisition costs, and income by activity is what keeps you on the safe side of that line.