The qualified business income (QBI) deduction under IRC Section 199A lets owners of pass-through businesses deduct up to 20% of their qualified business income on their personal return, on top of every ordinary business expense they already deduct. It applies to sole proprietors filing Schedule C, partners, S corporation shareholders, and many rental property owners. Originally scheduled to expire after 2025, the deduction was made permanent by the 2025 tax legislation.
How the 20% deduction works
Qualified business income is the net income of a qualified trade or business conducted in the United States: gross receipts minus the deductions properly allocable to that business. It excludes capital gains and losses, most dividends and interest, reasonable compensation an S corporation pays its owner, and guaranteed payments a partnership pays a partner. The deduction itself is the lesser of 20% of QBI or 20% of taxable income minus net capital gain, so a taxpayer whose income is mostly capital gain can watch the deduction shrink even with a healthy business profit.
Below a taxable income threshold, the calculation is simple and the full 20% applies no matter what the business does. Above the threshold, two limits phase in over a range. First, specified service trades or businesses (SSTBs), which include health, law, accounting, consulting, financial services, athletics, performing arts, and any business whose principal asset is the reputation or skill of its owner as the regulations narrowly define it, lose the deduction entirely once taxable income clears the top of the range. Second, every other business becomes subject to a cap equal to the greater of 50% of the W-2 wages the business paid, or 25% of W-2 wages plus 2.5% of the unadjusted basis of its depreciable property. A profitable business with no employees and no equipment can lose most of the deduction above the threshold for that reason alone.
The deduction is claimed on Form 8995 in simple cases or Form 8995-A once the limits apply, flows to Form 1040, and is available whether you itemize or take the standard deduction. It reduces income tax only. It never reduces self-employment tax.
2026 figures
The deduction rate is 20% of QBI for 2026, permanent under the 2025 legislation. The taxable income thresholds where the limits begin are indexed each year: for 2025 they were $197,300 for single filers and $394,600 for married filing jointly, and the 2026 amounts adjust upward for inflation, so check the annual IRS inflation adjustment release for the exact 2026 figure rather than assuming the 2025 number.
Two changes take effect for tax years beginning after 2025. The phase-in range above the threshold widens to $75,000 for single filers and $150,000 for joint filers, which softens the cliff for service business owners. And a minimum deduction of $400 (indexed after 2026) applies to any taxpayer with at least $1,000 of QBI from businesses in which they materially participate, so very small operations get something even when the general formula produces less.
For creators and the self-employed
For a creator reporting brand deals, ad revenue, digital product sales, or coaching income on Schedule C, the whole net profit is generally QBI. Two adjustments trip people up: QBI must be reduced by the deductible half of self-employment tax, by the self-employed health insurance deduction, and by pre-tax retirement contributions (SEP-IRA, solo 401(k)) attributable to the business. A $100,000 Schedule C profit does not produce a $20,000 deduction; it produces 20% of something noticeably smaller. The deduction also never touches Schedule SE, so your quarterly estimates on Form 1040-ES still have to cover the full 15.3% self-employment tax on the unreduced profit.
S corporation owners face a built-in tension. The W-2 salary the corporation pays its owner is not QBI, while the profit that flows through on Schedule K-1 (Form 1120-S) is. A bigger salary means more payroll tax and a smaller QBI deduction; an unreasonably small salary invites IRS reclassification. The right answer is a defensible reasonable compensation figure, not a number reverse-engineered from the Section 199A math. The corporation reports each shareholder's QBI items on the K-1, and the shareholder computes the deduction personally.
Consulting is on the SSTB list, so coaches and consultants with taxable income above the threshold need to model the phase-out before year end. Most content businesses (audience revenue, products, licensing) are not SSTBs, though endorsement income tied purely to a person's fame or likeness can fall under the reputation-or-skill clause.
Mistakes that cost money
Skipping the QBI reductions: forgetting to subtract half of self-employment tax, health insurance, and retirement contributions overstates the deduction, and IRS matching catches it, producing a notice, tax due, and interest.
Setting S corporation salary by the QBI math alone: cutting salary to inflate QBI without reasonable compensation support risks payroll tax reclassification, penalties, and interest that dwarf the deduction saved.
Assuming it reduces self-employment tax: it does not, and estimating quarterly payments as if it did produces an underpayment penalty on top of the shortfall.
Ignoring negative QBI: a loss year is not neutral. Negative QBI carries forward and reduces next year's deduction, which matters when a large equipment purchase or bonus depreciation election creates a paper loss.
Missing the aggregation election: owners of several related businesses above the threshold can often aggregate them so one entity's W-2 wages support another's deduction; failing to elect can forfeit five figures.
Interaction with taxable income, not business profit
The 20%-of-taxable-income cap means the deduction depends on your whole return, not just the business. A big capital gain year, a large standard or itemized deduction, or a spouse's W-2 income all move the answer. Married owners near the threshold can change the outcome with retirement contributions, since a solo 401(k) deferral lowers taxable income and can keep an SSTB owner inside the full 20% zone, even though the same contribution also trims QBI. The order of operations is worth modeling, not guessing.
If your taxable income is anywhere near the threshold, or you own an S corporation, have the Section 199A calculation modeled before December 31, while salary, retirement contributions, and equipment timing can still be changed.