Form 8995: the qualified business income deduction

The QBI deduction is one of the largest tax breaks available to owners of pass-through businesses, and the 2025 tax law made it permanent. Most small owners claim it on the short Form 8995. This guide explains how the form works and the limits that apply.

By Hamza Fida, Chartered Accountant. Reviewed by Muhammad Bilal, Chartered Accountant. Checked against official sources on . 3 minute read.

Short answer

Form 8995 claims the qualified business income (QBI) deduction, generally 20% of profit from a sole proprietorship, partnership, S corporation or LLC taxed as one. Use Form 8995 if your 2026 taxable income before the deduction is at or below $201,750, or $403,500 joint; above that, use Form 8995-A. The deduction is capped at 20% of taxable income less net capital gain.

At a glance

Deduction
Generally 20% of qualified business income
Form 8995
Taxable income up to $201,750, or $403,500 joint, for 2026
Form 8995-A
Above the threshold, or for patrons of cooperatives
New minimum
$400, with at least $1,000 of QBI, from 2026
Cap
20% of taxable income less net capital gain
Losses
Carry forward and reduce future QBI
Form 8995: the qualified business income deductionSteps: 1. List each business; 2. Add loss carryforwards; 3. Take 20%; 4. Apply the income cap; 5. Carry the result to Form 1040.THE PROCESS AT A GLANCEForm 8995: the qualified business income deduction1List eachbusinessWith its name, taxpayernumber and qualifiedbusiness income2Add losscarryforwardsPrior-year QBI lossesreduce this year'stotal3Take 20%Of the net QBI, plus20% of qualified REITdividends and PTPincome4Apply the incomecapThe deduction cannotexceed 20% of taxableincome less net capitalgain5Carry the resultto Form 1040It reduces taxableincome, not adjustedgross incomeChecked against official sourcesTax BakersForm 8995: the qualified business income deductionSteps: 1. List each business; 2. Add loss carryforwards; 3. Take 20%; 4. Apply the income cap; 5. Carry the result to Form 1040.THE PROCESS AT A GLANCEForm 8995: the qualified businessincome deduction1List each businessWith its name, taxpayer number and qualifiedbusiness income2Add loss carryforwardsPrior-year QBI losses reduce this year'stotal3Take 20%Of the net QBI, plus 20% of qualified REITdividends and PTP income4Apply the income capThe deduction cannot exceed 20% of taxableincome less net capital gain5Carry the result to Form 1040It reduces taxable income, not adjustedgross incomeChecked against official sourcesTax Bakers
The process at a glance: 1. List each business; 2. Add loss carryforwards; 3. Take 20%; 4. Apply the income cap; 5. Carry the result to Form 1040.

What counts as qualified business income?

Net profit from a US trade or business run as a sole proprietorship, partnership, S corporation or LLC taxed as one of these. It does not include wages, including an S corporation owner's salary, guaranteed payments to partners, investment income such as capital gains, dividends and interest, or income earned outside the US. See the QBI deduction explained.

Form 8995 or Form 8995-A?

SituationForm
Taxable income before the deduction at or below $201,750, or $403,500 joint, for 2026Form 8995
Taxable income above those thresholdsForm 8995-A, with the wage and property limits
Patron of an agricultural or horticultural cooperativeForm 8995-A

Above the threshold, the deduction can be limited by the W-2 wages the business pays and the property it holds, and phased out for specified service businesses, such as consulting, law and accounting, over a range of $75,000, or $150,000 joint.

How does Form 8995 work?

  1. List each business

    With its name, taxpayer number and qualified business income.

  2. Add loss carryforwards

    Prior-year QBI losses reduce this year's total.

  3. Take 20%

    Of the net QBI, plus 20% of qualified REIT dividends and PTP income.

  4. Apply the income cap

    The deduction cannot exceed 20% of taxable income less net capital gain.

  5. Carry the result to Form 1040

    It reduces taxable income, not adjusted gross income.

What does an example look like?

A single freelancer has $90,000 of Schedule C profit. The deduction for half of self-employment tax is about $6,358, so qualified business income is about $83,642. After that adjustment and the standard deduction, suppose taxable income before the QBI deduction is $70,000. The deduction is the lesser of 20% of QBI, about $16,728, and 20% of taxable income, $14,000. So the deduction is $14,000: here the income cap, not QBI, sets the limit.

What happens with business losses?

If your combined qualified business income is a loss, there is no deduction that year, and the loss carries forward to reduce QBI in later years. If one business makes a profit and another a loss, the loss reduces the profit before the 20% is applied. Track carryforwards from year to year, because they appear on the form.

Does the deduction reduce self-employment tax?

No. It reduces taxable income for income tax only. Self-employment tax is still calculated on the full net profit on Schedule SE. See Schedule SE.

What is the new minimum deduction?

From 2026, a taxpayer with at least $1,000 of qualified business income from businesses in which they materially participate gets a deduction of at least $400. Both amounts are adjusted for inflation in later years.

Who cannot claim it?

C corporations, employees on their wages, and non-resident aliens on income that is not effectively connected with a US business. Trusts and estates can claim it, and so can partners and S corporation shareholders on their share of business income reported on Schedule K-1.

How does an S corporation salary interact?

An S corporation owner's salary is not QBI, so a higher salary reduces the deduction, while too low a salary risks challenge. Above the threshold, though, wages paid by the business can increase the allowed deduction. See reasonable salary for S corp owners.

Getting your full QBI deduction?

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Questions people ask

What is Form 8995?

The simplified form for claiming the qualified business income deduction, generally 20% of pass-through business profit.

When do I use Form 8995-A instead of 8995?

When 2026 taxable income before the deduction is above $201,750, or $403,500 joint, or you are a patron of a cooperative.

Is an S corporation salary qualified business income?

No. Wages, including the owner's salary, are not QBI.

What is the minimum QBI deduction?

From 2026, $400 for taxpayers with at least $1,000 of QBI from businesses in which they materially participate.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. IRS: About Form 8995
  2. IRS: Qualified business income deduction
  3. IRS Revenue Procedure 2025-32: 2026 inflation adjustments

Rules and fees change. If you are reading this long after October 1, 2026, confirm the figures with the source before you rely on them.

Business tax by entity typeThe qualified business income deduction explainedFreelancers and self-employedSole proprietor taxes: how they workBusiness tax by entity typeReasonable salary for S corp owners

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This guide is general information. It is not tax or legal advice for your situation.