Qualified Business Income (QBI) Deduction Explained: Who Qualifies and How to Calculate It

The short answer: the qualified business income (QBI) deduction, created by Section 199A of the tax code, lets owners of pass-through businesses deduct up to 20% of their net business income on their personal tax return. It applies to sole proprietors, partners, LLC members, and S-corporation shareholders, but not to C corporations or to wages. Below a taxable income threshold, almost every pass-through owner gets the full deduction. Above it, limits based on your industry, the wages you pay, and the property you own start to apply. The deduction was scheduled to expire after 2025 but was made permanent by the One Big Beautiful Bill Act signed in July 2025.

What counts as qualified business income?

QBI is the net profit from a trade or business operated in the United States as a sole proprietorship, partnership, LLC, or S corporation. For most owners it is close to the bottom-line number on Schedule C or the ordinary business income on their K-1, but a few items are carved out. QBI does not include wages you earn as an employee, including the W-2 salary an S-corp owner pays themselves, guaranteed payments to partners, capital gains or losses, or interest and dividend income that is not part of the business. It is also reduced by the deductible half of self-employment tax, the self-employed health insurance deduction, and contributions to a self-employed retirement plan.

Rental real estate can qualify if the rental activity rises to the level of a trade or business. The IRS offers a safe harbor for rental enterprises with at least 250 hours of rental services per year and contemporaneous records, so landlords with a few passive properties should not assume they qualify without checking.

The 2026 income thresholds

The limits are based on your total taxable income before the QBI deduction, not just your business profit. For 2026, the threshold is $201,750 for single and head-of-household filers and $403,500 for married couples filing jointly. If your taxable income is at or below the threshold, you get the full 20% deduction regardless of what kind of business you run, how many employees you have, or what property you own. The only cap is that the deduction cannot exceed 20% of your taxable income minus net capital gains.

Above the threshold, the limits phase in over a range that the 2025 law widened. For 2026 the range is $75,000 for single filers (from $201,750 to $276,750) and $150,000 for joint filers (from $403,500 to $553,500). Once your taxable income passes the top of the range, the limits apply in full.

Specified service trades or businesses

The tax code singles out a category of businesses called specified service trades or businesses, or SSTBs. These include health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, and any business whose principal asset is the reputation or skill of its owners or employees. Engineering and architecture are specifically excluded from the list and are treated like any other business.

If you own an SSTB and your taxable income is below the threshold, you get the full deduction just like everyone else. In the phase-in range, the deduction shrinks proportionally. Above the top of the range, an SSTB owner gets no QBI deduction at all. A consultant filing jointly with $450,000 of taxable income in 2026 would get a partial deduction; the same consultant at $560,000 would get nothing.

Below the threshold, the type of business does not matter. Above it, an SSTB loses the deduction entirely, while a non-SSTB keeps it subject to wage and property limits.

The wage and property limit for high earners

For non-SSTB owners above the threshold, the deduction is limited to the greater of two amounts: 50% of the W-2 wages the business paid, or 25% of W-2 wages plus 2.5% of the unadjusted basis of qualified property, meaning the original cost of depreciable assets such as equipment, vehicles, and buildings. The deduction is the lesser of 20% of QBI or that wage-and-property figure.

This is why the S-corp salary decision cuts both ways. Salary paid to the owner is not QBI, so it reduces the 20% base. But it does count as W-2 wages, which can increase the wage limit for an owner above the threshold. A business with no employees and no significant property that earns well above the threshold can see its deduction shrink to nearly zero, and increasing owner salary is sometimes the fix.

A worked example

A single graphic designer operates as a sole proprietor and reports $100,000 of net profit on Schedule C in 2026. Her total taxable income before the QBI deduction is about $85,000, well under the $201,750 threshold, so no limits apply. Her QBI is $100,000 minus the deductible half of self-employment tax, roughly $7,065, for QBI of about $92,935. Her deduction is 20% of that, about $18,587. At a 22% marginal rate, the deduction saves her roughly $4,100 in federal income tax. It does not reduce self-employment tax, which is still calculated on the full net profit.

• Net profit on Schedule C: $100,000
• Less deductible half of self-employment tax: about $7,065
• Qualified business income: about $92,935
• QBI deduction (20%): about $18,587
• Approximate federal income tax saved at a 22% rate: about $4,100

How to claim it

The deduction is claimed on your Form 1040, not on a business return. If your taxable income is below the threshold, you use Form 8995, a one-page simplified computation. If you are above the threshold, own an SSTB, or have multiple businesses to aggregate, you use Form 8995-A. You do not need to itemize; the QBI deduction is available whether you take the standard deduction or not. Starting in 2026, taxpayers with at least $1,000 of QBI from a business they actively participate in are guaranteed a minimum $400 deduction.

Because the deduction depends on net profit, it is only as accurate as your books. Missed expenses inflate QBI and overstate the deduction; personal expenses mixed into the business do the same. At Stone Valley Accounting, the QBI calculation is part of every pass-through tax return we prepare, and for clients near the thresholds we model the effect of retirement contributions, S-corp salary, and equipment purchases on the deduction before year-end, when there is still time to change the outcome.

Planning moves that affect the QBI deduction

• Retirement contributions lower taxable income and can pull you under the threshold, but they also reduce QBI dollar for dollar, so the net effect has to be calculated.
• S-corp owners above the threshold should revisit reasonable compensation with the wage limit in mind, not just payroll tax savings.
• Owners of multiple businesses can elect to aggregate them, which lets wages and property from one business support the deduction for another.
• SSTB owners near the top of the phase-in range may benefit from accelerating deductions or deferring income to stay in a range where the deduction survives.
• Equipment purchases increase qualified property basis, which raises the limit for non-SSTB owners above the threshold.

Key takeaway: if your taxable income is under $201,750 single or $403,500 joint in 2026, you almost certainly qualify for the full 20% deduction. Above that, your industry, payroll, and property determine how much, if any, you keep.