The qualified business income deduction was supposed to expire at the end of 2025. It did not. The One Big Beautiful Bill Act made it permanent, widened the income range over which it phases out, and added a small floor for the smallest businesses. For most owner-managed businesses it remains the largest single deduction on the return, and the one most often calculated wrong.
This article covers what counts as qualified business income, the 2026 thresholds, the two very different things that happen above them depending on what kind of business you run, and the interaction with S-corp salary that can turn the deduction on or off entirely. Numbers throughout are for 2026 returns.
What the deduction is
Section 199A allows an individual to deduct 20% of qualified business income from a pass-through business: a sole proprietorship, partnership, LLC or S-corporation. It comes off taxable income, not adjusted gross income, so it does not reduce self-employment tax or affect the AGI-based phase-outs, and you get it whether or not you itemize.
Qualified business income is the net income of a trade or business conducted in the United States, with several things carved out. Investment income (capital gains, dividends, non-business interest) is not QBI. Wages you receive as an employee are not QBI. Reasonable compensation an S-corp pays its owner is not QBI, and neither are guaranteed payments to a partner. For a sole proprietor, QBI is also reduced by the deductible half of self-employment tax, self-employed health insurance, and retirement plan contributions attributable to the business.
Two ceilings apply to everyone. The deduction cannot exceed 20% of your taxable income less net capital gain, so a year with large capital gains or a small taxable income limits it. And it cannot create a loss: negative QBI in one year carries forward and reduces QBI the next.
New for 2026 is a floor: if you have at least $1,000 of QBI from businesses in which you materially participate, the deduction is at least $400. It is indexed for inflation from 2027. It matters only to very small businesses, but it means a side business with $1,500 of profit gets a $400 deduction rather than $300.
The 2026 thresholds
Below a taxable income threshold the deduction is simply 20% of QBI, subject to the ceilings above, regardless of what business you are in. For 2026 the threshold is $201,750 for single filers and $403,500 for joint filers, measured on taxable income before the QBI deduction itself.
Above the threshold, limitations phase in over a range that the 2025 Act widened from $50,000 to $75,000 for single filers and from $100,000 to $150,000 for joint filers. The limitations are fully in force at $276,750 single and $553,500 joint. The wider range is a real change: an owner at $250,000 of taxable income who would have been almost fully phased out under the old rules is now about two-thirds of the way through the range instead.
What the limitations are depends on whether the business is a specified service trade or business.
Specified service businesses: the deduction disappears
The list is in the statute: health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, investing and investment management, trading, and any business whose principal asset is the reputation or skill of one or more of its employees or owners. Architecture and engineering were deliberately left off it.
For an SSTB owner above the threshold, the deduction is reduced proportionally through the phase-in range and is zero at the top of it. A physician filing jointly with $553,500 or more of taxable income has no QBI deduction at all, no matter how the practice is structured. A consultant filing single at $250,000 keeps about 36% of it.
Two things people try, and how they go. Splitting a practice into a service entity and a non-service entity that provides it with premises, equipment or administration does not work if the two are commonly owned; the regulations treat the non-service entity's income as SSTB income to the extent it comes from the service business. And a business with only a small amount of service income is not an SSTB: if gross receipts are $25 million or less and under 10% of them come from services, the whole business is treated as non-service.
Everyone else: the wage and property limit
For a non-service business above the threshold, the deduction is capped at the greater of:
1. 50% of the W-2 wages the business paid, or
2. 25% of W-2 wages plus 2.5% of the unadjusted basis of qualified property, meaning depreciable tangible property still within its depreciable period (or ten years, if longer) that the business uses.
The cap phases in across the same $75,000 or $150,000 range, so at the threshold it has no effect and at the top of the range it applies in full. The second formula is there for capital-intensive businesses with few employees, and it is what makes real estate work: a building with a $2 million unadjusted basis supports $50,000 of deduction with no payroll at all.
The important word is W-2. A sole proprietor's own profit is not wages. Guaranteed payments to a partner are not wages. So a highly profitable sole proprietorship with no employees and no significant property, once above the top of the range, has a wage limit of zero and therefore a QBI deduction of zero. That is the setup for the most consequential interaction in this area.
The S-corp interaction, in both directions
An S-corporation's salary to its owner is W-2 wages. That single fact pushes on the deduction from two sides.
Below the threshold, salary hurts. QBI is profit after the owner's reasonable compensation, so every dollar of salary is a dollar removed from the base the 20% is calculated on. The entity choice article works through a $200,000 owner where a $100,000 salary costs more than $18,000 of deduction, and that cost is a large part of why the S-corp's real saving is a third of its advertised one.
Above the range, salary is the deduction. Take a contractor, single, with $400,000 of profit and no other employees. As a sole proprietor, taxable income is far above $276,750, W-2 wages are zero, and unless there is substantial depreciable property the deduction is zero. Now suppose the same business is an S-corp paying its owner $150,000. The wage limit becomes 50% of $150,000, so $75,000. QBI is $400,000 less the salary less the employer's $11,475 of payroll tax, so $238,525, and 20% of that is $47,705, comfortably under the limit. The deduction went from nothing to $47,705, worth about $16,700 at a 35% marginal rate, and that is on top of the payroll tax saving.
Notice what this does to the reasonable compensation question. Below the threshold, the tax incentive is toward a low salary and the IRS standard is the only thing pushing up. Above the range, the salary has to be high enough that half of it covers the deduction. The optimum is the point where 50% of wages equals 20% of the remaining QBI; for the contractor that is a salary of about $112,000, which produces a deduction of about $55,900. Below that point every dollar cut from salary costs 50 cents of deduction. Above it every dollar added costs about 22 cents of deduction plus payroll tax. An owner who set salary years ago and never revisited it as profit grew has almost certainly drifted away from that point in one direction or the other, and reasonable compensation still has to be satisfied wherever the arithmetic lands.
Rental property
Rental income is QBI only if the rental activity rises to the level of a trade or business, which is a facts-and-circumstances test that has generated a good deal of litigation. Revenue Procedure 2019-38 provides a safe harbour: 250 or more hours a year of rental services (by you, employees or contractors), separate books for the rental enterprise, and contemporaneous records of the hours. Triple-net leases are outside the safe harbour and usually outside the deduction. Property rented to a business you control is treated as QBI regardless, which matters for owners who hold their premises in a separate LLC.
Aggregation
Owners with more than one business can elect to aggregate them for the wage and property limit, provided the same people own at least 50% of each, they share a tax year, none is an SSTB, and they meet two of three integration tests (shared products or services, shared facilities or centralised functions, or interdependence). The point is to let a wage-heavy business support the deduction of a wage-light one. Once made, the election is binding for future years, so it is worth modeling before filing.
Three interactions that surprise people
Pre-tax retirement contributions are worth less than the bracket suggests. A contribution reduces QBI, so a $20,000 SEP contribution by a sole proprietor in the 24% bracket also removes $4,000 of QBI deduction. The real saving is 24% of $16,000, an effective rate of 19.2%. For an owner whose deduction is not otherwise limited, that shifts the pre-tax versus Roth comparison toward Roth more than most calculators allow for. It does not apply to an S-corp owner's elective deferrals, which come out of salary rather than QBI.
The taxable income ceiling bites in low-income years. The deduction cannot exceed 20% of taxable income less net capital gains. In a year with a large gain from selling property or investments, the ceiling can cut the deduction even though QBI is unchanged.
Your state may take part of it back. The deduction is federal. Some states conform to it, some do not allow it at all, and a few require higher-income filers to add it back in computing state taxable income. Whether that applies to your 2026 return depends on your state and your income, and the rules have changed more than once in recent years. Ask your preparer rather than assuming either way.
What to do with this
If your taxable income is below $201,750 single or $403,500 joint, take the 20% and make sure your preparer has not reduced QBI by anything that should not reduce it. If you are above the range and run a service business, the deduction is gone and the planning question is whether income can be moved across years or between spouses to bring taxable income back inside the range. If you are above the range and do not run a service business, the deduction is a function of W-2 wages and property, and your S-corp salary is a lever on it. That last group is where an hour of arithmetic pays for itself many times over, and it is the group most likely never to have had the arithmetic done.