Updated January 2026 — Now permanent under OBBBA 2025
QBI Deduction 2026: How to Deduct 20% of Your Business Income
The Section 199A Qualified Business Income (QBI) deduction is one of the most valuable tax breaks available to self-employed workers and small business owners. If you qualify, you can deduct up to 20% of your business income right off the top — reducing your federal income tax without spending a dollar.
What Is the QBI Deduction?
The QBI deduction — formally known as the Section 199A deduction — was created by the Tax Cuts and Jobs Act of 2017. It allows owners of pass-through businesses to deduct up to 20% of their qualified business income from their federal taxable income.
The term "pass-through" refers to businesses where income flows through to the owner's personal tax return rather than being taxed at the entity level. This includes:
- Sole proprietors filing Schedule C
- Single-member LLCs taxed as sole proprietors
- Partnerships and multi-member LLCs
- S-Corporations (on the owner's distributive share)
- Reduces your federal income tax
- Is an "above-the-line" deduction on your 1040
- Works alongside the standard or itemized deduction
- Applies automatically — no special filing required beyond Form 8995
- Does not reduce your self-employment tax
- Does not reduce your state income tax (in most states)
- Does not apply to C-Corporation income
- Does not apply to wages from a W-2 job
2026 Income Thresholds
The QBI deduction is most straightforward for taxpayers below the income thresholds. If your taxable income (not just business income) is below the threshold for your filing status, you can deduct 20% of your QBI with no additional calculations.
| Filing Status | Phase-in Begins | Full Phase-out |
|---|---|---|
| Single / MFS / HOH | $197,300 | $247,300 |
| Married Filing Jointly | $394,600 | $494,600 |
Below the Threshold
If your taxable income is at or below the threshold, you receive the full 20% deduction on your qualified business income. No W-2 wage calculations required. This covers the majority of self-employed workers and freelancers.
Above the Threshold
Once your taxable income exceeds the threshold, restrictions begin to apply:
- SSTB owners begin losing the deduction (phased out completely at $247,300 single / $494,600 MFJ)
- Non-SSTB owners face W-2 wage and qualified property limitations
- The deduction is still available to non-SSTBs above the threshold — but requires more complex calculations
Specified Service Trades or Businesses (SSTBs)
A Specified Service Trade or Business (SSTB) is a business in a field where the principal asset is the reputation or skill of one or more of its employees or owners. Owners of SSTBs face an important restriction: once their income exceeds the thresholds, they lose the QBI deduction entirely.
- Law and legal services
- Accounting and tax preparation
- Consulting
- Financial services and investing
- Healthcare (physicians, dentists, therapists)
- Performing arts
- Athletics and sports
- Brokerage services
- Engineering
- Architecture
- Manufacturing and retail
- Real estate
- Technology (software, IT)
- Restaurants and food service
- Construction
- Most trades and skilled labor
W-2 Wage Limitation (For High Earners)
For non-SSTB business owners whose taxable income exceeds the threshold, the QBI deduction is limited to the greater of two W-2 wage-based formulas:
The Impact on Sole Proprietors
Sole proprietors with no employees pay no W-2 wages — which means both formulas above equal zero. If a sole proprietor's income exceeds the threshold, they may lose the QBI deduction entirely (if an SSTB) or be severely limited (if not an SSTB with no payroll).
S-Corp Strategy
One advantage of electing S-Corp status is that your owner-employee salary counts as W-2 wages. For a high-earning business owner above the threshold, paying yourself a reasonable W-2 salary through an S-Corp creates the wage base needed to claim a meaningful QBI deduction, even at high income levels.
How to Calculate Your QBI Deduction
For taxpayers below the income threshold, the calculation is simple. Here is the step-by-step process:
Worked Example: $80,000 QBI, Single Filer
| Net Schedule C profit | $80,000 |
| Less: SE tax deduction (~$5,652) | − $5,652 |
| Qualified Business Income (QBI) | $74,348 |
| Taxable income (after standard deduction) | $57,448 |
| Below $197,300 threshold? (single) | YES |
| QBI deduction = $74,348 × 20% | $14,870 |
| Income cap check: 20% × $57,448 | $11,490 |
| QBI Deduction (limited by income cap) | $11,490 |
Note: The taxable income cap often applies before reaching the dollar figure of 20% × QBI. The deduction is the lesser of 20% of QBI or 20% of taxable income (after subtracting net capital gains).
How to Claim the QBI Deduction
Claiming the QBI deduction requires completing one of two IRS forms, depending on your situation:
Use this if your taxable income is below the threshold ($197,300 single / $394,600 MFJ). It is a straightforward one-page form. Most freelancers and self-employed individuals will use this form.
Required if your income exceeds the threshold, you have multiple businesses, carry-forward QBI losses, or complex situations involving W-2 wage and property limitations.
The calculated QBI deduction flows from Form 8995 or 8995-A to Schedule 1, Line 13, and then to Form 1040, Line 13. It reduces your taxable income directly — it is truly an above-the-line deduction that works whether you take the standard deduction or itemize.