The qualified business income (QBI) deduction: the basics for 2026

If you run a business as a sole proprietor, or own part of a partnership or S corporation, you may be able to deduct up to 20% of your business profit on top of your other deductions. That's the qualified business income (QBI) deduction, also called the section 199A deduction. The 2025 tax law made it permanent and added a small minimum deduction from 2026. ⁶ This page covers who gets it, what counts as QBI, the income levels where extra limits start, and an example.

Who can take it

The deduction is for owners of businesses that aren't C corporations: sole proprietorships (Schedule C), partnerships, S corporations, and some trusts and estates. ¹ Income earned through a C corporation, or as an employee, doesn't qualify. ¹

S corporations and partnerships don't take the deduction themselves. They report each owner's share of the items needed (QBI, W-2 wages, property basis, and whether the business is a specified service business) with the Schedule K-1, and each owner figures the deduction on their own return. ^{2 3}

You don't have to itemize. The deduction is taken whether you itemize or use the standard deduction. ¹ It reduces taxable income, but not adjusted gross income or self-employment tax.

What counts as qualified business income

QBI is the net income from a qualified trade or business carried on in the United States. It is reduced by deductions connected to the business, including the deductible part of self-employment tax, self-employed health insurance, and retirement plan contributions. ¹

These don't count as QBI: ¹

• investment income, such as capital gains, most dividends and interest not tied to the business;
• wages, including reasonable compensation an S corporation pays its owner;
• payments a partnership makes to a partner for services regardless of profit (section 707(c) payments).

That second point matters for S corporation owners: the salary you pay yourself isn't QBI, only the profit left after it. See Paying yourself from an S corporation.

Rental real estate can count if the rental rises to the level of a trade or business, and the IRS offers a safe harbor (Rev. Proc. 2019-38) for rental enterprises that meet its record-keeping and hours tests. ¹

The basic calculation

At its simplest, the deduction is the smaller of:

1. 20% of your QBI (plus 20% of qualified REIT dividends and publicly traded partnership income), or
2. 20% of your taxable income minus net capital gain.

^{1 4}

The second limit is why a household with a large standard deduction, or big capital gains, can end up with less than 20% of its business profit.

The income thresholds for 2026

Below a taxable income threshold, the basic calculation is the whole story. For 2026 the threshold is $403,500 on a joint return and $201,750 for most other filers. ⁵

Above the threshold, two extra limits phase in over a range that ends at $553,500 (joint) or $276,750 (others). ⁵ The 2025 law widened that range starting in 2026. ⁴

• The wage and property limit. The deduction for each business can't be more than a figure based on the W-2 wages the business pays and the original cost of its depreciable property. A business with no employees and little equipment can lose most of the deduction above the range. ^{4 1}
• The specified service rule. A specified service trade or business (SSTB), one in fields such as health, law, accounting, actuarial science, performing arts, athletics, financial services and investment management, or any business whose main asset is the reputation or skill of its owners or employees, loses the deduction gradually through the range and entirely above it. ²

Below the threshold, neither limit applies: a dentist or an accountant gets the same deduction as a plumber. ²

The new minimum deduction (from 2026)

Starting with tax years beginning after 2025, there's a floor. If you have at least $1,000 of QBI from active businesses (ones in which you materially participate), your deduction is at least $400. ^{1 5} It mainly helps people with small side businesses.

Which form

Most people use Form 8995, the simplified computation, when taxable income before the deduction is at or below the threshold and they aren't a patron of an agricultural or horticultural cooperative. Everyone else uses Form 8995-A. ³

What to gather

• Schedule C, or Schedules K-1 with their section 199A statements, for each business.
• Records of self-employed health insurance, retirement contributions and self-employment tax.
• For rentals, records supporting trade-or-business status or the safe harbor.
• Any QBI loss carried forward from last year's Form 8995 or 8995-A.