Key Takeaways
- The QBI deduction allows eligible pass-through business owners to deduct up to 20% of qualified business income, now made permanent by the One Big Beautiful Bill Act.
- Specified Service Trades or Businesses (SSTBs) face income-based phase-outs that can reduce or eliminate the deduction entirely.
- Strategic income management, entity structuring, and retirement plan contributions can help maximize the deduction.
What Is the QBI Deduction?
The Qualified Business Income (QBI) deduction, established under Section 199A of the Internal Revenue Code, allows owners of pass-through businesses to deduct up to 20% of their qualified business income from their federal taxable income. This deduction was originally introduced by the Tax Cuts and Jobs Act of 2017 and was set to expire at the end of 2025. The One Big Beautiful Bill Act, signed into law in 2025, made the QBI deduction permanent — providing long-term certainty for business owners and their tax planning.
The deduction is taken "below the line," meaning it reduces taxable income but not adjusted gross income (AGI). It is available regardless of whether you itemize deductions or take the standard deduction. For a business owner in the 24% bracket, a $50,000 QBI deduction reduces their federal tax bill by $12,000 — a significant benefit that effectively lowers the top marginal rate on pass-through income from 37% to 29.6%.
Who Qualifies for the QBI Deduction?
The QBI deduction is available to individuals who receive income from pass-through business entities. These include:
Sole proprietorships — business income reported on Schedule C of your personal tax return. S corporation shareholders — your share of S corp income flows through to your personal return on Schedule K-1. Partnerships and LLCs taxed as partnerships — your distributive share of partnership income reported on Schedule K-1. Certain trusts and estates — qualified business income flowing through to beneficiaries may also be eligible.
C corporations do not qualify because they are taxed at the entity level under their own corporate tax rate. The QBI deduction exists specifically to provide parity between pass-through business owners and the lower corporate tax rates that C corporations enjoy.
How the Deduction Is Calculated
The QBI deduction is the lesser of two amounts: 20% of your qualified business income, or 20% of your taxable income minus net capital gains (including qualified dividends). This second limitation ensures that the deduction cannot exceed 20% of your overall taxable income and that it is not used to offset income from investments rather than business operations.
Qualified business income itself is the net amount of qualified items of income, gain, deduction, and loss from any qualified trade or business. It does not include investment income, capital gains, interest income not related to the business, wage income as an employee, or guaranteed payments from a partnership for services rendered.
Income Thresholds and Phase-Outs for 2026
Below certain income thresholds, the QBI deduction is straightforward: you receive the full 20% deduction regardless of your business type. Above those thresholds, additional limitations kick in based on whether your business is a Specified Service Trade or Business (SSTB) and whether your business pays sufficient W-2 wages or holds qualified property.
For the 2026 tax year (estimated, as thresholds are indexed for inflation): single filers begin the phase-out at approximately $191,950 in taxable income, with the phase-out range extending $50,000 above that threshold. Married filing jointly filers begin the phase-out at approximately $383,900, with a $100,000 phase-out range above that threshold.
Below these thresholds, every pass-through business owner receives the full 20% deduction with no additional tests or limitations.
Specified Service Trades or Businesses (SSTBs)
The tax code singles out certain service-oriented businesses for less favorable treatment under the QBI rules. These Specified Service Trades or Businesses include: health care, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, and any trade or business where the principal asset is the reputation or skill of one or more employees or owners.
For SSTB owners below the income thresholds, the distinction does not matter — they receive the full 20% deduction. However, as taxable income enters the phase-out range, the deduction for SSTBs is progressively reduced. Once taxable income exceeds the top of the phase-out range ($241,950 for single filers, $483,900 for joint filers in 2026), the QBI deduction for SSTB income is eliminated entirely.
Non-SSTB business owners above the thresholds are subject to different limitations based on W-2 wages paid and the unadjusted basis of qualified property, but their deduction is never completely eliminated based solely on income level.
W-2 Wage and Property Limitations
For non-SSTB businesses with owners above the income thresholds, the QBI deduction is limited to the greater of: 50% of the W-2 wages paid by the business, or 25% of W-2 wages plus 2.5% of the unadjusted basis of all qualified property immediately after acquisition. This is known as the W-2/UBIA limitation.
Qualified property includes depreciable tangible property used in the business that is within its depreciable period (or 10 years after being placed in service, whichever is longer). This limitation primarily affects capital-intensive businesses that own significant real estate or equipment, giving them credit for their property investments even if they pay modest wages.
QBI Deduction by Income Level: SSTB vs. Non-SSTB
The following table illustrates how the QBI deduction differs for SSTB and non-SSTB businesses at various income levels, assuming $300,000 of QBI from a single business (married filing jointly). The non-SSTB business is assumed to meet W-2 wage and property requirements.
| Taxable Income (MFJ) | QBI Available | Non-SSTB Deduction | SSTB Deduction |
|---|---|---|---|
| $200,000 | $300,000 | $40,000 (20% of $200K taxable income cap) | $40,000 (same — below threshold) |
| $383,900 | $300,000 | $60,000 (full 20% of QBI) | $60,000 (at threshold, not yet phased out) |
| $433,900 | $300,000 | $60,000 (full, W-2/UBIA met) | $30,000 (50% phase-out) |
| $483,900+ | $300,000 | $60,000 (full, W-2/UBIA met) | $0 (fully phased out) |
Strategies to Maximize the QBI Deduction
Manage taxable income to stay below thresholds. For business owners near the phase-out thresholds, reducing taxable income by even a modest amount can preserve tens of thousands in QBI deductions. Strategies include maximizing retirement plan contributions, timing business expenses, and using charitable giving strategies like donor-advised funds to concentrate deductions in high-income years.
Maximize retirement plan contributions. Contributions to qualified retirement plans — such as a solo 401(k), SEP-IRA, or defined benefit plan — reduce taxable income dollar for dollar. A business owner earning $420,000 who contributes $36,000 to a solo 401(k) reduces their taxable income to $384,000, potentially staying below the SSTB phase-out threshold and preserving the full QBI deduction.
Evaluate entity structure. Some business owners may benefit from electing S corporation status, which can separate wage income (subject to payroll taxes but not QBI) from distributive share income (eligible for QBI). However, the IRS requires "reasonable compensation" for S corp shareholders who perform services, so this strategy must be implemented carefully.
When an S corporation pays its owner-employee a salary, that salary is not included in QBI — only the remaining pass-through profit qualifies. Setting compensation too high reduces the QBI deduction, while setting it too low invites IRS scrutiny. The compensation must reflect what a comparable employee would earn for similar work. Getting this balance right is critical: the optimal split can mean thousands of dollars in combined payroll tax savings and QBI deduction benefits each year.
Aggregate related businesses when beneficial. The tax code allows business owners with multiple pass-through entities to aggregate them for QBI purposes, which can help meet the W-2 wage and property limitations. Aggregation is particularly useful when one business generates significant QBI but pays few wages, while another pays substantial wages but generates less income.
An SSTB cannot be aggregated with a non-SSTB business. If you operate both types, they must be calculated separately. Additionally, if an SSTB owns 50% or more of a non-SSTB, the non-SSTB may be treated as an SSTB for QBI purposes. Business owners who operate in multiple entities should work with a tax advisor to ensure their structure does not inadvertently taint non-SSTB income with SSTB classification.
Planning Ahead With the Permanent QBI Deduction
Now that the QBI deduction is permanent, business owners can engage in longer-term planning with confidence. There is no longer a need to accelerate income to take advantage of an expiring provision or worry about losing the deduction in a future tax year. This permanence enables multi-year strategies such as building up retirement plan balances to manage taxable income, evaluating entity conversions with a longer payback period, and coordinating QBI planning with estate and succession planning.
The QBI deduction represents one of the most valuable tax benefits available to pass-through business owners. Understanding the rules, knowing your thresholds, and working with a financial advisor to implement the right strategies can save you thousands of dollars in taxes every year for the life of your business.
This article is for informational purposes only and does not constitute investment advice. All information should be discussed with a qualified financial advisor before implementation.
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