The 199A deduction lets owners of sole proprietorships, partnerships, S corporations and some trusts deduct up to 20% of their qualified business income (QBI). It was scheduled to expire after 2025. The One Big Beautiful Bill Act (OBBBA), signed in July 2025, made it permanent, widened the phase-in ranges and added a small minimum deduction for active owners. For 2026 returns, the starting threshold is $201,750 of taxable income for single filers and $403,500 for joint filers.
The deduction sits below adjusted gross income. You claim it whether you itemize or take the standard deduction, and it reduces taxable income only. It does not reduce self-employment tax or AGI-based phaseouts. Income earned through a C corporation or as an employee never qualifies, according to the IRS qualified business income deduction page.
Three changes apply to tax years beginning after December 31, 2025:
The rate stayed at 20%. An earlier House version proposed 23%, but that did not survive in the final law. If you are reviewing other OBBBA provisions that interact with QBI, the permanent 100% bonus depreciation rules matter most, because depreciation lowers QBI while also adding to qualified property.
The IRS published these figures in section 4.26 of Rev. Proc. 2025-32. "Taxable income" here means taxable income before the QBI deduction itself.
| Filing status | 2025 threshold | 2025 phase-in ends | 2026 threshold | 2026 phase-in ends |
|---|---|---|---|---|
| Married filing jointly | $394,600 | $494,600 | $403,500 | $553,500 |
| Married filing separately | $197,300 | $247,300 | $201,775 | $276,775 |
| Single, head of household, all others | $197,300 | $247,300 | $201,750 | $276,750 |
How the bands work:
QBI is the net amount of qualified income, gain, deduction and loss from a US trade or business. It is calculated after business deductions such as depreciation, the deductible half of self-employment tax, self-employed health insurance and retirement contributions attributable to the business.
QBI excludes:
That second exclusion is why owner salary decisions interact so closely with this deduction. An S corporation owner's wage is excluded from QBI and counts toward the business's W-2 wage limit. Our piece on S corp reasonable compensation covers how the IRS tests that number.
Qualified REIT dividends and qualified publicly traded partnership income get their own separate 20% component. That component is not subject to the wage and property limit.
An SSTB is a business in health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services or brokerage services. It also covers investing, trading and businesses whose principal asset is the reputation or skill of an owner or employee. The regulations read that last category narrowly, mainly endorsement, licensing and appearance fees. Engineering and architecture are expressly excluded, so an engineering firm is not an SSTB.
A de minimis rule keeps a small amount of service revenue from tainting a business. If gross receipts are $25 million or less, the business is not an SSTB when less than 10% of its gross receipts come from specified services. Above $25 million, the cutoff is 5%.
If a business is an SSTB and the owner's taxable income tops the 2026 phase-in end ($276,750 single, $553,500 joint), that business's QBI produces no deduction. That is a big reason CPAs look at entity selection and income timing for professional practices.
Above the threshold, the deduction for each business is the lesser of:
Qualified property is depreciable tangible property held and used in the business at year end, still within its depreciable period. That period is the later of 10 years from placed-in-service or the end of its normal recovery period. Bonus depreciation does not reduce UBIA. So a $400,000 machine expensed under the Section 179 and bonus depreciation rules still adds $10,000 (2.5%) to the property prong for a decade.
Payments to independent contractors are not W-2 wages. A business that runs on 1099 labor can lose most of its deduction once the owner crosses the threshold.
All five use 2026 thresholds. Taxable income is before the QBI deduction.
A single plumbing contractor has $120,000 of QBI and, after the standard deduction and other items, $110,000 of taxable income with no capital gains.
Wages and SSTB status are irrelevant at this income level, but the overall cap still bites.
A single management consultant has $150,000 of QBI and $180,000 of taxable income. She is under $201,750, so SSTB status does not matter.
A married couple owns a manufacturing S corporation. Joint taxable income is $600,000, above $553,500. The business has $400,000 of QBI, $100,000 of W-2 wages and $800,000 of UBIA.
A married CPA owns an accounting practice. Joint taxable income is $478,500, exactly halfway through the $150,000 range ($75,000 over $403,500). QBI is $300,000, W-2 wages are $60,000 and qualified property is negligible.
At $553,500 or more of taxable income, the same practice would get zero.
A single teacher runs an active tutoring business on the side and materially participates. QBI is $1,500. Twenty percent of that is $300, but because active QBI is at least $1,000, the minimum applies.
The minimum works off aggregate active QBI. Passive investments do not count toward the $1,000 floor.
When an owner has several businesses, QBI, wages and UBIA are tested separately for each one. If one business has a QBI loss, that loss reduces the positive QBI of the others in proportion. Any net QBI loss carries forward to reduce next year's QBI.
Under Treas. Reg. 1.199A-4, an owner can elect to aggregate businesses so wages from one entity support QBI in another. The requirements:
Once you aggregate, you must keep doing it consistently and attach a disclosure statement every year.
Rental real estate qualifies when the activity rises to a trade or business. Rev. Proc. 2019-38 gives a safe harbor: separate books for each enterprise, 250 or more hours of rental services a year (or in three of the past five years for older enterprises), contemporaneous time logs and a statement attached to the return. Triple-net leases are excluded. Investors comparing structures can read about choosing an LLC, partnership or REIT for real estate.
Manage taxable income near the threshold. Retirement contributions, a cash-basis billing cutoff and bunching charitable gifts can pull a joint filer back under $403,500. Itemized gifts lower taxable income directly. For clients who take the standard deduction, the new charitable deduction for non-itemizers also comes off taxable income, though the amounts are small.
Set S corp salary deliberately. Above the threshold, a higher salary can raise the deduction by lifting the wage limit, even though it lowers QBI. Below the threshold, salary only reduces QBI. The best number depends on where the owner lands, which is why we run projections at several salary levels. If the client is still a sole proprietor, see what it takes to make an S corp election on Form 2553.
Watch S corp basis. Losses suspended for lack of basis do not reduce QBI until they are allowed. Accurate Form 7203 basis tracking keeps the QBI loss carryforward right.
Weigh the C corporation alternative. A C corporation pays 21% and gets no QBI deduction. For an owner in the top bracket with a full 20% deduction, the effective rate on QBI is 29.6% (37% x 80%), before the second layer of tax on dividends. Our C corp vs S corp comparison covers when the switch makes sense.
Use the simplified Form 8995 when taxable income before the QBI deduction is at or below the threshold and you are not a patron of an agricultural or horticultural cooperative. Everyone else files Form 8995-A with its schedules for SSTBs, aggregation and loss netting.
Partnerships and S corporations report each owner's QBI, W-2 wages, UBIA and SSTB status on the K-1. If a pass-through fails to report these items, the owner's share of positive QBI, W-2 wages and UBIA is presumed to be zero. Records worth keeping include payroll registers tied to Forms W-3, a fixed-asset ledger with original placed-in-service dates and basis, SSTB gross receipts analysis and aggregation statements. Clean small business tax planning starts with books that separate these items monthly, not at filing time.
Because the deduction comes after AGI, states that start from federal AGI do not pick it up. Owners in those states get no state benefit. A handful of states start from federal taxable income and may allow it, sometimes with add-backs. Many states also offer an elective pass-through entity tax, which shifts state tax to the entity level and can reduce QBI at the same time. Our explainer on how the pass-through entity tax works walks through that trade-off, and coordinating federal and state tax planning covers the wider picture.
Is the 199A deduction permanent now? Yes. The OBBBA removed the end-of-2025 expiration, so the deduction continues for 2026 and later years. Congress can still change it in future legislation, but no sunset date is in the current statute.
Does the 199A deduction reduce self-employment tax? No. It reduces income tax only. Self-employment tax is still calculated on net earnings from self-employment before any QBI deduction.
Can a W-2 employee claim the QBI deduction? Not on wage income. If the same person also has a side business, that business's net profit can qualify, and the $400 minimum may apply if they materially participate and have at least $1,000 of QBI.
Do guaranteed payments to partners count as QBI? Guaranteed payments for services are excluded from the recipient partner's QBI. The partnership still deducts them, which lowers the QBI allocated to all partners.
What happens if my QBI is negative? A net QBI loss gives no deduction this year and carries forward to reduce QBI in the following year. It does not affect the separate REIT and PTP component.
Madras Accountancy prepares QBI workpapers, Form 8995-A schedules and multi-scenario salary projections for US CPA firms under their own brand. If your team wants help with 199A calculations this filing season, talk to us about white-label tax support.
The section 4960 excise tax is 21% of nonprofit pay over $1M. From 2026 it covers all employees. See the medical carve-outs, Form 4720 and a worked example.
The paid family and medical leave tax credit is permanent from 2026. See the 12.5% to 25% rates, the premium option, the 6-month rule and how Form 8994 works.
Opportunity zones become permanent in 2027 under the One Big Beautiful Bill. See the new deferral, rural bonus, and the 2026 handoff.
