QBI Deduction 2026: Section 199A 20% Pass-Through Guide, Now Permanent

The Qualified Business Income (QBI) deduction, created by the 2017 Tax Cuts and Jobs Act under Internal Revenue Code Section 199A, allows owners of pass-through businesses — sole proprietorships, partnerships, S-corporations, and certain trusts and estates — to deduct up to 20% of their qualified business income from federal taxable income. It was originally scheduled to expire after December 31, 2025, but the One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, made Section 199A a permanent part of the tax code and adjusted several of its mechanics for 2026 and beyond.

This guide explains how the 20% deduction is calculated, the exact 2026 income thresholds published by the IRS in Revenue Procedure 2025-32, what counts as a Specified Service Trade or Business (SSTB), the wage and UBIA limitation that applies to higher earners, and the new $400 minimum deduction OBBBA added starting in 2026.

What Is the QBI Deduction?

The Qualified Business Income deduction is a personal income tax deduction — not a business deduction — available to owners of pass-through entities: sole proprietorships (Schedule C), partnerships, S-corporations, and certain qualifying trusts and estates. It does not apply to C-corporations, which already receive a flat 21% corporate rate. QBI itself is the net amount of qualified items of income, gain, deduction, and loss from a qualified trade or business, calculated separately for each business the taxpayer owns.

QBI specifically excludes: W-2 wages paid to the taxpayer as an employee, reasonable S-corp shareholder compensation, guaranteed payments to partners, capital gains and losses, dividend income, and most interest income not properly allocable to the business. Real Estate Investment Trust (REIT) dividends and qualified Publicly Traded Partnership (PTP) income get their own 20% deduction under Section 199A, calculated separately from — and combined with — the QBI deduction from operating businesses.

Who Can Claim It

The deduction is available whether or not the taxpayer itemizes deductions — it is taken as a below-the-line deduction from taxable income, in addition to the standard deduction or itemized deductions. It is reported on Form 8995 (simplified version, for taxpayers below the income threshold) or Form 8995-A (for taxpayers above the threshold, including those affected by the SSTB or wage/UBIA limitation).

How the 20% Deduction Is Calculated

For most taxpayers below the 2026 income threshold, the calculation is straightforward. The deduction equals the lesser of:

• 20% of qualified business income from all qualified trades or businesses, combined with 20% of qualified REIT dividends and qualified PTP income, OR
• 20% of taxable income, minus net capital gains (including qualified dividends).

The second limb matters because the QBI deduction cannot exceed 20% of a taxpayer's total taxable income after subtracting capital gains — it is capped at the household level, not just the business level.

Example: Below the Threshold

A single freelance graphic designer has $90,000 of net Schedule C profit (after the deductible half of self-employment tax) and takes the $16,100 standard deduction for 2026, with no other income. Taxable income before the QBI deduction is roughly $73,900. Her QBI deduction is the lesser of 20% × $90,000 ($18,000) or 20% × $73,900 ($14,780) — so her deduction is capped at $14,780 by the taxable-income limit, not the QBI limit itself. Because she is well below the $201,750 single threshold, no SSTB or wage/UBIA limitation applies regardless of her profession.

The $400 Minimum Deduction (New for 2026)

OBBBA added a floor: if a taxpayer materially participates in at least one qualified trade or business and has aggregate QBI of at least $1,000 from that business, the QBI deduction cannot be less than $400, even if 20% of QBI would otherwise compute to less than $400. This primarily helps very small or early-stage businesses with thin margins. It does not apply to SSTBs excluded by income, to REIT/PTP income, or to businesses in which the taxpayer does not materially participate.

What Are the 2026 QBI Income Thresholds?

The QBI deduction has two income tiers that determine which limitations apply. These thresholds are set annually by the IRS for inflation and were re-set for 2026 in Revenue Procedure 2025-32 to reflect OBBBA's changes:

Below the threshold column, taxpayers get the full 20% deduction (subject only to the taxable-income cap) regardless of profession, wages paid, or property owned — this is true for SSTBs and non-SSTBs alike. Between the threshold and the fully-phased-in column, the deduction phases out for SSTBs and the wage/UBIA cap phases in for non-SSTBs. Above the fully-phased-in amount, SSTBs get no deduction at all, and non-SSTBs are fully subject to the wage/UBIA cap.

Why the Range Widened Under OBBBA

Before 2026, the phase-in range was $50,000 for single filers and $100,000 for joint filers. OBBBA Section 70105 amended IRC Section 199A(b)(3)(B) to widen this to $75,000 (single) and $150,000 (joint), giving more taxpayers a gradual phase-in instead of hitting the limitation abruptly. This wider range is now a permanent part of the statute, not a temporary 2026-only adjustment.

What Counts as a Specified Service Trade or Business (SSTB)?

An SSTB is a business in a field where IRS regulations treat the deduction as more likely to reflect owner labor than capital investment. Under Treasury regulations interpreting Section 199A(d)(2), SSTBs include trades or businesses in:

• Health (physicians, dentists, nurses, and other providers of medical services directly to patients — but not health clubs, spas, or medical device/drug manufacturers)
• Law
• Accounting
• Actuarial science
• Performing arts
• Consulting
• Athletics
• Financial services
• Brokerage services
• Investing and investment management, trading, or dealing in securities/commodities/partnership interests
• Any trade or business where the principal asset is the reputation or skill of one or more employees or owners (e.g., a business built around endorsement deals or licensing a person's name/likeness)

Explicitly NOT an SSTB: Engineering and Architecture

Engineering and architectural services were deliberately carved out of the SSTB definition when Section 199A's regulations were finalized, despite being professional services. This means an architecture firm or engineering firm owner gets the full 20% QBI deduction even at high income levels, subject only to the wage/UBIA limitation that applies to all non-SSTB businesses above the threshold — not the harsher SSTB phase-out to zero.

The SSTB Cliff Above the Threshold

For an SSTB owner whose taxable income exceeds the fully-phased-in amount ($276,750 single / $553,500 MFJ for 2026), the QBI deduction for that SSTB is completely eliminated — 0%, not a reduced percentage. This is a much harsher outcome than the wage/UBIA cap that applies to non-SSTBs, which typically still allows some deduction even for high earners with sufficient wages or qualified property.

How Does the Wage and UBIA Limitation Work?

For non-SSTB businesses with taxable income above the threshold, the 20%-of-QBI deduction gets capped by a formula tied to what the business pays in W-2 wages and invests in depreciable property. This formula is unchanged by OBBBA. Once fully phased in, the deduction for that business cannot exceed the greater of:

• 50% of the business's W-2 wages paid to employees during the year, OR
• 25% of W-2 wages, plus 2.5% of the UBIA (unadjusted basis immediately after acquisition) of qualified property still within its depreciable period.

"Qualified property" generally means tangible depreciable property used in the business and still within the longer of its regular depreciation period or 10 years. This second option (25% wages + 2.5% UBIA) helps capital-intensive businesses — like manufacturing, real estate, or equipment-heavy operations — that pay relatively low wages but hold substantial depreciable assets, such as a rental real estate business with few employees but a large building basis.

Worked Example: Above-Threshold Non-SSTB

A married couple filing jointly has $700,000 of taxable income from a manufacturing S-corp (a non-SSTB), fully above the $553,500 fully-phased-in threshold for 2026. The business pays $150,000 in W-2 wages and holds qualified property with $400,000 of UBIA. 20% of QBI (assume $200,000 of QBI) would be $40,000, but the wage/UBIA cap is the greater of: 50% × $150,000 = $75,000, or 25% × $150,000 + 2.5% × $400,000 = $37,500 + $10,000 = $47,500. Since $75,000 exceeds both the $40,000 QBI-based figure and the $47,500 alternative formula, the deduction is not reduced by the cap in this case — the couple can claim the full $40,000 (assuming the taxable-income limit doesn't reduce it further). If the business paid only $40,000 in wages instead, the cap would drop to the greater of $20,000 (50% × wages) or $20,000 (25% × $40,000 + 2.5% × $400,000 = $10,000 + $10,000), meaningfully limiting the deduction below the $40,000 QBI-based figure.

Worked Examples at Different 2026 Income Levels

Example 1: Below Threshold — Full Deduction Regardless of Profession

A single attorney (an SSTB) nets $150,000 in QBI from her solo practice and takes the $16,100 standard deduction, with no other income. Taxable income is about $133,900 — well under the $201,750 single threshold. She gets the full 20% deduction: the lesser of 20% × $150,000 ($30,000) or 20% × $133,900 ($26,780). Her SSTB status is irrelevant below the threshold.

Example 2: Inside the SSTB Phase-In Range

A single consultant (an SSTB) has $240,000 of taxable income for 2026 — inside the $201,750–$276,750 phase-in range ($38,250 into the $75,000 range, or 51%). Her SSTB QBI deduction is reduced proportionally: she can claim roughly 49% of the deduction she would otherwise get, with the wage/UBIA formula also applied on a blended basis for the applicable percentage. This partial-year mechanics is calculated on Form 8995-A using the IRS worksheets, not a simple straight-line estimate, so consultants near the midpoint of the range should use tax software or a CPA rather than estimate by hand.

Example 3: Above Threshold — Engineering Firm (Non-SSTB)

A married engineering firm owner has $600,000 of taxable income, above the $553,500 MFJ fully-phased-in point. Because engineering is explicitly excluded from the SSTB definition, the deduction is not eliminated — it is only subject to the wage/UBIA cap described above. With adequate W-2 wages paid to employees, this owner can still claim a substantial QBI deduction even at this income level, unlike an SSTB owner in the identical income position.

Example 4: Small Business Below the $1,000 QBI Floor Test

A part-time single-member LLC owner has $700 of net QBI for the year from a side business in which she materially participates, with no other business income. Because her QBI is below $1,000, the new $400 minimum deduction under Section 199A(i) does not apply — she is limited to 20% × $700 = $140 (before any taxable-income cap), since the minimum-deduction floor requires at least $1,000 of QBI to unlock the guaranteed $400.

How Do I Claim the QBI Deduction?

Most taxpayers below the 2026 threshold ($201,750 single / $403,500 MFJ) file the simplified Form 8995. Taxpayers above the threshold, or anyone with income from an SSTB, a PTP, or multiple businesses requiring aggregation, generally must use the more detailed Form 8995-A and its accompanying schedules (A, B, C, and D) to calculate SSTB phase-outs, wage/UBIA limitations, and REIT/PTP components separately before combining them. Tax preparation software typically handles this automatically once business income, W-2 wages paid, and property basis are entered correctly — but the source data (payroll reports, depreciation schedules) needs to be accurate for the wage/UBIA calculation to be reliable.

Common Mistakes

Frequent errors include: failing to reduce QBI by the deductible portion of self-employment tax and self-employed retirement/health insurance deductions attributable to that business; misclassifying a borderline SSTB (for example, assuming a business that merely serves SSTB clients is itself an SSTB, which is not automatically true); and forgetting that guaranteed payments to partners and reasonable S-corp shareholder wages are excluded from QBI even though they reduce the entity's taxable profit.