The QBI deduction, formally the qualified business income deduction under section 199A, lets you deduct up to 20% of your qualified business income from a sole proprietorship, partnership or S corporation on your 2026 personal return. It’s capped at 20% of your taxable income, figured before the QBI deduction, minus net capital gain (increased by any qualified dividends). If your 2026 taxable income before the deduction is at or below $201,750 ($403,500 if you’re married filing jointly, $201,775 if you’re married filing separately), you use the shorter Form 8995, and a specified service trade or business is still treated as qualified.
You’ll also hear it called the section 199A deduction or the pass-through deduction. It reduces income tax, not self-employment tax, and it doesn’t apply to C corporation profits or wages you earn as an employee. The figures below come from the IRS 2026 Instructions for Form 8995 (draft, catalog 69662S, dated June 17, 2026) and the 2026 draft of Schedule A (Form 8995-A). Those drafts are what the IRS has published for the 2026 tax year; your CPA should confirm the final versions when you file.
What counts as qualified business income (and what doesn’t)
Qualified business income is the net profit from a domestic trade or business that you operate as a sole proprietor, partner or S corporation shareholder. It includes the ordinary income, deductions and losses tied to that business, after things like the deductible part of self-employment tax, self-employed health insurance and retirement plan contributions.
Just as important is what the IRS says is not QBI. Wages you receive as an employee don’t count. Reasonable compensation from an S corporation doesn’t count. Guaranteed payments to a partner, and payments a partner receives for services other than in their capacity as a partner, don’t count. Capital gains, most interest and dividends, and income that isn’t effectively connected with a U.S. trade or business are out too.
That S corporation piece is the one I see founders miss. The salary you pay yourself is ordinary wage income. It never becomes QBI. Only the profit left after that salary can qualify.
2026 QBI deduction thresholds and which form to file
The income number that matters is your 2026 taxable income before the QBI deduction, not your business’s gross revenue and not your adjusted gross income.
Filing status
Use Form 8995 at or below
SSTB fully out above
Married filing jointly
$403,500
$553,500
Married filing separately
$201,775
$276,775
Single, head of household and all other returns
$201,750
$276,750
At or below the first column, you use Form 8995, the simplified computation, as long as you aren’t a patron of a specified agricultural or horticultural cooperative. Above that number, you use Form 8995-A. In the band between the two columns, a specified service business is only partly in, and you complete Schedule A (Form 8995-A). Above the second column, that specified service business doesn’t qualify for the deduction at all.
One more cap applies to everyone, including people under the threshold: the whole QBI deduction can’t be more than 20% of your taxable income before the deduction, minus net capital gain. A big capital gain in the same year can shrink the write-off even if your business profit looks healthy.
The SSTB phaseout: why a consultant and a product company are treated differently
A specified service trade or business, or SSTB, is the IRS’s list of service fields that lose this deduction once your taxable income climbs high enough. The 2026 Form 8995 instructions name health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, investing and investment management, and trading or dealing in securities, partnership interests or commodities. The list also includes a narrow “reputation or skill” category: endorsement income, fees for licensing your name or likeness, and appearance fees.
If you’re under the threshold, an SSTB is treated like any other qualified business. Cross into the phase-in range and only an applicable percentage of that business still counts, shrinking as your income rises. Cross the upper number and the SSTB is out.
Here’s a simple teaching example, with made-up numbers, so you can see the fork in the road. Say you’re single, you run a consulting practice, and your QBI is $180,000.
- If your taxable income before the QBI deduction is $190,000, you’re under the $201,750 threshold. Twenty percent of $180,000 is $36,000, and 20% of $190,000 is $38,000, so the deduction is $36,000.
- If that same practice produces taxable income of $290,000, you’re above $276,750. The consulting income is from an SSTB, and it no longer qualifies. The QBI deduction from that business is zero.
Now change only the business. Same person, same $180,000 of QBI and $290,000 of taxable income, but the company sells a product and isn’t an SSTB. The deduction doesn’t vanish. It gets tested against the wage and property limit instead.
The W-2 wage and qualified property limit above the threshold
Once your taxable income before the QBI deduction is above the threshold, the 20% figure for each qualified business can be limited to the greater of 50% of the W-2 wages that business paid, or 25% of those W-2 wages plus 2.5% of the unadjusted basis immediately after acquisition (UBIA) of its qualified property. Inside the phase-in range, that limit comes in gradually. Above the top of the range, it applies in full. Under the threshold, it doesn’t apply at all.
This is where a lean one-person company can get a surprise. A sole proprietor who pays no W-2 wages and holds little depreciable property may have a full 20% deduction under the threshold and a much smaller one, or none, once income is high enough for the limit to apply. Don’t hire people or buy equipment just to chase a tax deduction. If your profit is climbing toward the threshold, sit down with a CPA before year end and look at the real numbers, not a rule of thumb.
Keep going with the product-company example. $180,000 of QBI, $290,000 of taxable income, single filer, no capital gain. Twenty percent of the QBI is $36,000. If that company paid $40,000 of W-2 wages and has no qualified property, 50% of those wages is $20,000, so the QBI component is limited to $20,000. If it paid no W-2 wages and has no qualified property, that limit is zero. Same profit. Different payroll facts. Different deduction.
The new $400 minimum deduction for 2026
New in the 2026 Form 8995 instructions is a minimum deduction. If your aggregate QBI from qualified trades or businesses in which you materially participate (in the sense of section 469(h)) is at least $1,000, you get a QBI deduction of at least $400. Material participation is required for this minimum. It is not required for the regular QBI deduction.
For most founders with real profit, $400 isn’t the story. It’s a floor for smaller active side businesses. The IRS added lines on the 2026 Form 8995 to compute it. Don’t assume it applies if you don’t materially participate, and don’t stretch a hobby into a trade or business to get it.
What this means if you pay yourself from an S corporation
This is not another entity-choice article. If you’re already comparing an S corp vs LLC, you know the election is about payroll tax on wages versus distributions. For the QBI deduction, that same split does two jobs, and they pull in opposite directions.
Reasonable compensation is not QBI, so a larger salary shrinks the profit that can receive the 20% deduction. Above the threshold, though, W-2 wages are also what feed the wage limit. Paying yourself nothing can hurt that test. Paying yourself everything can leave little QBI. There’s no magic percentage in the IRS instructions, and anyone who sells you one is guessing. The job is to pay a salary you can defend, then let a CPA run the QBI math on the leftover profit.
How to actually use the QBI deduction this year
You claim it on your personal return, Form 1040, after you complete Form 8995 or Form 8995-A. It isn’t a business-return deduction, and you can take it whether you itemize or take the standard deduction. It does not lower the profit that self-employment tax is figured on.
Before year end, do three practical things. First, estimate your 2026 taxable income before the QBI deduction, not just your revenue, so you know whether you’re under the threshold, in the phase-in range or over the top. Second, if you have more than one business, get clear on which of them, if any, is an SSTB. Third, if you’re close to a threshold, talk to a CPA about the actual levers you still have, including retirement contributions and the timing of income and expenses. This belongs on your list of year-end tax moves, not something you first look at in April.
I’m not your tax advisor, and this isn’t advice for your return. The IRS draft instructions are the source for every 2026 dollar figure in this article. Use them with a CPA who can apply the rules to your filing status, your entity and your numbers.
Frequently asked questions
What is the QBI deduction?
The QBI deduction, or section 199A deduction, is a personal income tax deduction of up to 20% of qualified business income from a sole proprietorship, partnership or S corporation, limited to 20% of taxable income before the deduction minus net capital gain.
What are the 2026 QBI deduction thresholds?
For 2026, you use Form 8995 if taxable income before the QBI deduction is at or below $403,500 married filing jointly, $201,775 married filing separately, or $201,750 for all other returns. Above those amounts, you use Form 8995-A.
Does a specified service trade or business get the QBI deduction?
Yes, if your taxable income before the deduction is at or below the 2026 threshold. In the phase-in range only part of the SSTB qualifies. Above $553,500 joint, $276,775 married filing separately, or $276,750 for other returns, the SSTB doesn’t qualify.
Is the QBI deduction $400 for everyone in 2026?
No. The $400 figure is a minimum, and only if your aggregate QBI from businesses you materially participate in is at least $1,000. Most founders with real profit will use the regular 20% computation, which is usually larger.
Does the QBI deduction reduce self-employment tax?
No. It is an income tax deduction on your Form 1040. It does not reduce net earnings from self-employment, so Schedule SE is still figured on the full profit.
Can I claim the QBI deduction if I operate as an S corporation?
Yes, on the profit that passes through to you, but not on the reasonable compensation the S corporation pays you. That salary is wage income, not qualified business income.
Disclaimer: Addicted2Success content is for general informational purposes only and is not a substitute for personalized advice from a qualified, licensed professional. Always seek professional counsel for your specific situation before making decisions.
