The qualified business income deduction explained

The qualified business income deduction, also called the Section 199A or QBI deduction, is one of the largest tax breaks available to small business owners, and a 2025 law made it permanent. This guide explains who can claim it, how it is calculated, and the limits that apply at higher incomes.

By Awais Jameel, Chartered Accountant. Reviewed by Mirza Fahad Baig, Chartered Accountant. Checked against official sources on . 3 minute read.

Short answer

The QBI deduction lets owners of pass-through businesses deduct up to 20% of their qualified business income, capped at 20% of taxable income minus net capital gain. For 2026, limits start above $201,750 of taxable income for single filers and $403,500 for joint filers, and a new $400 minimum applies with at least $1,000 of qualified income from an active business.

At a glance

Deduction
Up to 20% of qualified business income
Overall cap
20% of taxable income minus net capital gain
2026 thresholds
$201,750 single, $201,775 married filing separately, $403,500 joint
Phase-in range from 2026
$75,000, or $150,000 for joint filers
New minimum from 2026
$400, with at least $1,000 of QBI from an active business
Forms
8995, or 8995-A above the threshold
The qualified business income deduction explainedDeduction: Up to 20% of qualified business income; Overall cap: 20% of taxable income minus net capital gain; 2026 thresholds: $201,750 single, $201,775 married filing separately, $403,500 joint; Phase-in range from 2026: $75,000, or $150,000 for joint filers; New minimum from 2026: $400, with at least $1,000 of QBI from an active business; Forms: 8995, or 8995-A above the threshold.KEY FACTS AT A GLANCEThe qualified business income deduction explainedDeductionUp to 20% of qualifiedbusiness incomeOverall cap20% of taxable incomeminus net capital gain2026 thresholds$201,750 single, $201,775married filing separately,$403,500 jointPhase-in range from 2026$75,000, or $150,000 forjoint filersNew minimum from 2026$400, with at least$1,000 of QBI from anactive businessForms8995, or 8995-A above thethresholdChecked against official sourcesTax BakersThe qualified business income deduction explainedDeduction: Up to 20% of qualified business income; Overall cap: 20% of taxable income minus net capital gain; 2026 thresholds: $201,750 single, $201,775 married filing separately, $403,500 joint; Phase-in range from 2026: $75,000, or $150,000 for joint filers; New minimum from 2026: $400, with at least $1,000 of QBI from an active business; Forms: 8995, or 8995-A above the threshold.KEY FACTS AT A GLANCEThe qualified business incomededuction explainedDeductionUp to 20% of qualified business incomeOverall cap20% of taxable income minus net capital gain2026 thresholds$201,750 single, $201,775 married filingseparately, $403,500 jointPhase-in range from 2026$75,000, or $150,000 for joint filersNew minimum from 2026$400, with at least $1,000 of QBI from anactive businessForms8995, or 8995-A above the thresholdChecked against official sourcesTax Bakers
Key facts at a glance, as set out in this guide.

Who can claim it?

Individuals, and some trusts and estates, with qualified business income from a sole proprietorship, partnership, S corporation or LLC taxed as one of these. C corporations cannot claim it. The deduction is taken on the owner's personal return, and it reduces taxable income but not adjusted gross income or self-employment tax.

What counts as qualified business income?

The net income from a qualified trade or business that is effectively connected with a US trade or business. It excludes:

  • wages you receive, including an S corporation owner's salary,
  • guaranteed payments to partners for services,
  • capital gains and losses, and most interest and dividend income.

How is it calculated below the threshold?

If your taxable income before the deduction is at or below the threshold, $201,750 for single filers and $403,500 for joint filers for 2026, the deduction is the smaller of:

  • 20% of your qualified business income, and
  • 20% of your taxable income minus net capital gain.

Example: a single freelancer with $80,000 of qualified business income and $64,000 of taxable income before the deduction can deduct the smaller of $16,000 and $12,800, which is $12,800. It is claimed on Form 8995.

Most owners claim it on Form 8995.

What changes above the threshold?

Above the threshold, two limits phase in over the next $75,000 of taxable income, or $150,000 for joint filers, and apply in full above $276,750 single or $553,500 joint for 2026:

  • The wage and property limit. The deduction for each business cannot exceed the greater of 50% of the W-2 wages it pays, or 25% of those wages plus 2.5% of the original cost of its qualified property.
  • Specified service businesses. Businesses in fields such as health, law, accounting, consulting, financial services, performing arts and athletics, and those whose main asset is the owner's reputation or skill, lose the deduction gradually, and entirely above the top of the range.

Engineering and architecture are not specified service businesses. Above the threshold, the deduction is calculated on Form 8995-A.

What changed for 2026?

The 2025 tax law made the deduction permanent, widened the phase-in ranges from $50,000 and $100,000 to $75,000 and $150,000, and added a minimum deduction of $400 for anyone with at least $1,000 of qualified business income from active businesses in which they materially participate. Both amounts are indexed for inflation after 2026.

How does S corp salary interact with it?

Salary paid to an S corporation owner is not qualified business income, so a higher salary reduces it. Above the threshold, though, the wages the company pays count towards the wage limit. Owners near the threshold should look at both effects together. See reasonable salary for S corp owners.

Can foreign owners claim it?

Only income effectively connected with a US trade or business can be qualified business income. See effectively connected income explained.

Want to make the most of the QBI deduction?

We calculate your QBI deduction, check how salary, wages and business type affect it, and plan around the 2026 thresholds.

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Questions people ask

What is the QBI deduction?

A deduction of up to 20% of qualified business income for owners of pass-through businesses, capped at 20% of taxable income minus net capital gain.

What are the QBI income thresholds for 2026?

$201,750 for single filers, $201,775 for married filing separately and $403,500 for joint filers, with limits fully applying at $276,750 and $553,500.

What is the $400 minimum QBI deduction?

From 2026, taxpayers with at least $1,000 of qualified business income from active businesses they materially participate in get a deduction of at least $400.

Can a C corporation claim the QBI deduction?

No. It is only for individuals, and some trusts and estates, with income from pass-through businesses.

Sources

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

  1. IRS Revenue Procedure 2025-32, section 4.26: 2026 section 199A threshold amounts
  2. Internal Revenue Code section 199A, as amended by Public Law 119-21 (2025)
  3. IRS: Form 8995 and instructions
  4. IRS: Form 8995-A and instructions

Rules and fees change. If you are reading this long after September 30, 2026, confirm the figures with the source before you rely on them.

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