If you own a business that reports on your personal return, you may be able to subtract up to 20% of that business income before your tax is figured. That is the qualified business income deduction, usually called the QBI deduction or the Section 199A deduction. It matters to freelancers, sole proprietors, landlords, and owners of partnerships and S corporations.
What Changed for 2026
The deduction came from the Tax Cuts and Jobs Act and was scheduled to end after 2025. The One Big Beautiful Bill Act (Public Law 119-21) changed that in section 70105. Three points matter for 2026 returns:
- The deduction continues. The old expiration rule was replaced, and the new text has no end date. The rate stays at 20%.
- The phase-in range is wider. It was $50,000 ($100,000 for joint returns). For tax years beginning after December 31, 2025, it is $75,000 ($150,000 for joint returns).
- There is a $400 minimum deduction for owners who take an active role in a business and have at least $1,000 of qualified business income. More on that below.
Who Qualifies for the QBI Deduction
You need qualified business income (QBI) from a trade or business in the United States that is not run through a regular C corporation. In practice that means a sole proprietorship (Schedule C), a partnership, an S corporation, or certain trusts and estates. Partnerships and S corporations report your share on a Schedule K-1, and you claim the deduction on your own return.
QBI is the net profit of the business after its deductions. These are not QBI:
- Wages from a job. Work done as an employee is not a qualified business, and W-2 wages do not count.
- Reasonable compensation an S corporation pays you, and guaranteed payments from a partnership.
- Capital gains and losses, dividends, and interest that is not tied to the business.
- Tip income you deduct under the new tips deduction.
Your QBI is also reduced by the business-related deductions that sit on your personal return: the deductible half of self-employment tax, the self-employed health insurance deduction, and contributions to your own retirement plan. If the business has a net loss, you get no deduction from it that year, and the loss carries forward to reduce QBI in later years.
Rental real estate counts only if it rises to the level of a trade or business. See our rental property tax guide. A hobby is not a trade or business, so see hobby versus business taxes if your side project is borderline, and our W-2 vs 1099 page if your worker status is unclear.
Specified Service Businesses (SSTBs)
A specified service trade or business is treated differently once income gets high. The list covers health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, and investing or investment management. It also covers any business whose main asset is the reputation or skill of its owners or employees, such as fees for endorsements, licensing your name or likeness, or appearing at events or in media.
Some fields are not on the list. Engineering and architecture are not SSTBs. Real estate agents and insurance agents are carved out of brokerage services, and selling products or teaching courses is not consulting, according to the IRS instructions.
The rule is simple. At or below the income threshold, an SSTB qualifies like any other business. Inside the phase-in range, only part of it counts. Above the range, an SSTB gets no QBI deduction.
2026 Income Thresholds and Phase-In Range
These figures come from Revenue Procedure 2025-32 and apply to taxable income before the QBI deduction.
| Filing Status | Threshold (2026) | Top of Phase-In Range (2026) |
|---|---|---|
| Single, head of household, and all other returns | $201,750 | $276,750 |
| Married filing jointly | $403,500 | $553,500 |
| Married filing separately | $201,775 | $276,775 |
For comparison, the 2025 threshold was $197,300 for most filers and $394,600 for joint filers. To estimate your taxable income, start with our 2026 standard deduction and tax brackets pages.
- Below the threshold: you take a straight 20% of QBI, subject to the taxable income cap below. SSTBs are treated like any other business.
- Inside the phase-in range: the wage and property limits phase in gradually, and an SSTB counts only partly.
- Above the range: the wage and property limits apply in full, and an SSTB is out.
How to Calculate the Deduction
For a filer under the threshold, the math has four steps:
- Add up your QBI for each business after the adjustments above.
- Multiply by 20%. Add 20% of any qualified REIT dividends and publicly traded partnership income.
- Figure the taxable income cap: 20% of your taxable income before this deduction, minus your net capital gain (plus any qualified dividends).
- Your deduction is the smaller of the two numbers.
The deduction lowers taxable income. It does not reduce your self-employment tax or your net investment income tax.
Example 1: Joint filers, QBI is the limit
A married couple filing jointly has a freelancer with $80,000 of Schedule C profit and a spouse with $60,000 of W-2 wages. Self-employment tax is $11,304, and half of it, $5,652, is deductible. QBI is $80,000 minus $5,652, or $74,348. Adjusted gross income is $134,348, and taxable income before the QBI deduction is $134,348 minus the $32,200 standard deduction, or $102,148.
- 20% of QBI: $14,870
- 20% of taxable income: $20,430
- QBI deduction: $14,870 (the smaller number)
Federal income tax falls from $11,897 to $9,977, a saving of about $1,919.
Example 2: Single filer, taxable income is the limit
Now take a single freelancer with the same $80,000 profit and no other income. QBI is again $74,348, so 20% is $14,870. But taxable income before the deduction is only $74,348 minus the $16,100 standard deduction, or $58,248, and 20% of that is $11,650. The cap wins, and the deduction is $11,650 instead of $14,870. Tax drops from $7,527 to $5,344, a saving of about $2,183.
A large capital gain shrinks the cap further, since net capital gain is subtracted first.
The W-2 Wage and Property Limits
Above the threshold, the 20% of QBI for each business cannot exceed the greater of two amounts:
- 50% of the W-2 wages the business paid, or
- 25% of the W-2 wages plus 2.5% of the unadjusted basis immediately after acquisition (UBIA) of qualified property.
UBIA is the original cost basis of depreciable property the business owns and uses, measured on the day it was placed in service. Property counts until the later of 10 years after it was placed in service or the end of its recovery period. A business with $20,000 in wages and $1,000,000 of qualifying property has a limit of $30,000 ($5,000 plus $25,000), which beats 50% of wages at $10,000. A sole proprietor with no employees and no equipment has a limit of zero once fully above the range.
Inside the phase-in range, the limit applies only to a share of the gap. That share is how far your taxable income has moved above the threshold, divided by the $75,000 range ($150,000 for joint returns).
Example 3: An S corporation owner inside the range
A single owner takes a $60,000 salary from her S corporation and receives $190,000 of K-1 income, which is her QBI. The corporation's W-2 wages are $60,000. Taxable income before the QBI deduction is $250,000 minus $16,100, or $233,900.
- Share of the range used: ($233,900 minus $201,750) divided by $75,000 equals 42.87%
- 20% of QBI: $38,000
- Wage limit, 50% of $60,000: $30,000
- Gap: $8,000, times 42.87%, equals a reduction of $3,429
- QBI component: $38,000 minus $3,429, or $34,571
- Taxable income cap: 20% of $233,900, or $46,780, which does not bind
The deduction is $34,571. Federal income tax drops from $51,304 to $40,437, a saving of roughly $10,867. If her income were above $276,750, the wage limit would cap the component at $30,000.
Example 4: A consultant (SSTB) inside the range
A single consultant has $200,000 of QBI, no employees, and taxable income of $240,000 before the deduction. That is 51% of the way through the range, so only 49% of the business counts. Counted QBI is $98,000 and 20% of it is $19,600. With no wages, the limit is zero, and 51% of the gap is removed: $19,600 minus $9,996 leaves a deduction of $9,604.
The New $400 Minimum Deduction
Starting in 2026, a taxpayer with at least $1,000 of combined QBI from businesses they materially participate in gets a deduction of at least $400. Material participation uses the same test as the passive activity rules. Both amounts are indexed for inflation after 2026.
Say someone with a day job earns $1,500 of profit from a side business they run themselves. Half of the self-employment tax is $106, so QBI is $1,394. Twenty percent is $279, but the minimum lifts the deduction to $400. At a 22% bracket that is worth about $88.
How to Claim It: Form 8995 or 8995-A
You use Form 8995, the simplified form, if your taxable income before the deduction is at or below the threshold and you are not a patron of an agricultural or horticultural cooperative. It is a short calculation: 20% of QBI, 20% of REIT and partnership income, and the taxable income cap.
You use Form 8995-A if your income is above the threshold, or if you are a cooperative patron. It adds the wage and property limits, the phase-in math, and schedules for SSTBs, aggregation of businesses, and loss netting. The result goes on your Form 1040. Use the version for your tax year.
Common Mistakes
Counting the wrong income. Gross receipts, W-2 salary, and S corporation wages are not QBI. Use net profit after the adjustments for half of self-employment tax, health insurance, and retirement plan contributions. See our freelancer deductions list.
Forgetting the taxable income cap. As Example 2 showed, 20% of QBI is only the starting point. The deduction can never exceed 20% of taxable income after net capital gain.
Misjudging SSTB status or the thresholds. Taxable income is measured before the QBI deduction itself. Check where you land before a year-end move such as an extra retirement contribution.
Frequently Asked Questions
Do I have to itemize to get it? No. It is figured after the standard or itemized deduction, so you can take it either way.
Does it reduce my self-employment tax? No. Net earnings from self-employment are not reduced by the QBI deduction. See our self-employment tax rate page and self-employment tax guide for that side of the bill.
Does it affect my estimated payments? It lowers your expected tax for the year, which can lower what you need to send in. See quarterly estimated taxes.
Run Your Own Numbers
Use the Income Tax Calculator to see your taxable income and the Self-Employment Tax Calculator to find the deductible half of your self-employment tax before you work out QBI.
This article is general information, not tax advice, so check your own situation with a tax professional or the IRS instructions.