QBI Deduction Explained: Who Gets the 20 Percent
The section 199A deduction from the ground up — eligible income, the threshold, the limitations, and the 2025 law's changes
Reviewed by the Fairlight Accounting cross-border tax team — U.S. & Canadian Tax Desks
The qualified business income (QBI) deduction lets owners of sole proprietorships, partnerships, S corporations, and rental businesses deduct up to 20 percent of business income on their personal return. Below a taxable-income threshold it applies to every business; above it, specified service businesses lose it and others are capped by wages and property. The 2025 legislation made it permanent.
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Who qualifies?
Any individual, trust, or estate with income from a pass-through trade or business — Schedule C sole proprietors and single-member LLCs, partners in partnerships and multi-member LLCs, S corporation shareholders, and owners of rental real estate that rises to the level of a trade or business (or that meets the Rev. Proc. 2019-38 safe harbor: 250 or more hours of rental services a year — or in three of the last five years for an enterprise at least four years old — with separate books and contemporaneous time records). C corporation income does not qualify (the corporation pays its own, lower flat rate instead), and neither does income earned as an employee. The deduction is claimed on Form 8995 (simple cases, below the threshold) or Form 8995-A, and reduces taxable income — not adjusted gross income and not self-employment tax.
What counts as qualified business income?
The net income from the qualified business: gross receipts less the deductions attributable to it — including the deductible half of self-employment tax, the self-employed health insurance deduction, and retirement plan contributions, which all reduce QBI even though they appear elsewhere on the return. Not included: wages the owner receives (an S corporation shareholder's salary is not QBI — it leaves the base, which is the QBI cost of the S election), guaranteed payments to partners, capital gains and losses, dividends, interest not allocable to the business, and income from outside the United States. Qualified REIT dividends and publicly traded partnership income get their own 20 percent deduction without the wage-and-property limits.
How is the deduction computed?
| Step | What happens |
|---|---|
| 1. Compute QBI for each trade or business | Net qualified income (or loss) per business |
| 2. Check taxable income against the threshold | Below: 20 percent of QBI, skip to step 5. Above: continue |
| 3. Classify each business | SSTB or non-SSTB (the SSTB guide) |
| 4. Apply the limitations | SSTB: phase out across the range to zero. Non-SSTB: lesser of 20 percent of QBI or the greater of 50 percent of W-2 wages / 25 percent of wages + 2.5 percent of UBIA (the UBIA guide), phased in across the range |
| 5. Apply the overall cap | Deduction cannot exceed 20 percent of taxable income minus net capital gain |
| 6. Net losses | A business with negative QBI reduces the others' QBI proportionally; an overall negative carries forward to reduce next year's QBI |
Aggregation: a taxpayer with several non-SSTB businesses under 50 percent or greater common ownership, on the same tax year and sharing two of three connections (related products or services, shared facilities or centralized functions, operational interdependence), may elect to aggregate them, combining their QBI, wages, and UBIA — useful when one business has the income and another has the payroll. Once made, the aggregation must be reported consistently each year, with a disclosure statement on the return.
What is the threshold?
A taxable-income figure (indexed; for 2026, US$201,750 for single filers and US$403,500 for joint filers), measured before the QBI deduction and including all income on the return. The phase-out range above it was widened for years after 2025 by the 2025 legislation, to US$75,000 for single filers and US$150,000 for joint filers (from US$50,000 and US$100,000). The threshold is the single most important number in QBI planning: the deduction below it is unconditional, and the strategy for taxpayers just above it is to get below it — usually through retirement contributions, which reduce taxable income dollar for dollar and, for an SSTB owner in the range, rescue the deduction as well (the SSTB vs non-SSTB guide).
What did the 2025 legislation change?
Permanence — the deduction had been scheduled to expire after 2025 and is now a permanent feature of the Code. A wider phase-out range for years after 2025, slowing the loss of the deduction for SSTB owners and the phase-in of the wage-and-property limit for others. And a minimum deduction for taxpayers with at least a modest amount of business income (from 2026, a minimum deduction of US$400 for a taxpayer with at least US$1,000 of qualified business income from businesses in which they materially participate, both figures indexed after 2026). The structure — 20 percent, the threshold, the SSTB list, the wage-and-property formula — is otherwise unchanged.
What does it interact with?
The S election: an S corporation's reasonable salary is W-2 wages (helping the limitation above the threshold) but leaves QBI (costing 20 percent of the salary in deduction below it) — the trade-off every entity guide on this site runs. Retirement contributions: they reduce both QBI and taxable income, so the deduction falls slightly while the threshold strategy may restore it entirely. Rental real estate: qualifies if it is a trade or business, with the 250-hour safe harbor as the bright line and triple-net leases excluded from the safe harbor. Losses: a business loss reduces the QBI of the taxpayer's other businesses and carries forward as negative QBI if it exceeds them.
Worked example
A married couple: she runs a landscaping company (S corporation, non-SSTB) netting US$210,000 after her US$80,000 salary, with US$260,000 of crew wages and US$400,000 of UBIA in trucks and equipment; he is a W-2 engineer earning US$300,000. Taxable income lands above the range. Her QBI: US$210,000 (her salary is excluded). Tentative deduction: US$42,000. Wage-and-property limit: 50 percent of US$340,000 total W-2 wages (crew plus her salary) = US$170,000 — far above US$42,000, so no reduction. Overall cap: 20 percent of taxable income exceeds US$42,000. Deduction: US$42,000, reducing their taxable income directly. Had her business been a consulting firm with the same numbers, the SSTB classification above the range would have zeroed it.
Frequently asked questions
What is the qualified business income deduction?
A deduction of up to 20 percent of the net income from a pass-through trade or business, claimed on the owner's personal return, subject to a taxable-income threshold above which specified service businesses lose it and others are limited by W-2 wages and property.
Who qualifies for the QBI deduction?
Owners of sole proprietorships, partnerships, S corporations, and qualifying rental businesses. C corporation income and employee wages do not qualify.
Is the QBI deduction permanent?
Yes. The 2025 legislation made it permanent; it had previously been scheduled to expire after 2025.
Does an S corporation salary reduce QBI?
Yes — the owner's reasonable salary is W-2 wages, not qualified business income, so it leaves the QBI base. Above the threshold, those same wages support the wage-and-property limitation.
Official sources
The IRS states: “This component of the deduction equals 20 percent of QBI from a domestic business operated as a sole proprietorship or through a partnership, S corporation, trust, or estate.” — Internal Revenue Service, Qualified business income deduction, https://www.irs.gov/newsroom/qualified-business-income-deduction
The IRS Section 199A FAQs state: “If the taxpayer's taxable income (before the QBID) is above the threshold amount, the deduction may be limited based on whether the business is an SSTB, the W-2 wages paid by the business and the UBIA of qualified property used by the business. These limitations are phased in for taxpayers with taxable income (before the QBID) within the phase-in range and are fully applied to those whose taxable income exceeds the phase-in range.” — Internal Revenue Service, Section 199A qualified business income deduction FAQs, https://www.irs.gov/newsroom/tax-cuts-and-jobs-act-provision-11011-section-199a-qualified-business-income-deduction-faqs
Next step
Fairlight Accounting is a cross-border accounting and tax practice with a U.S. Tax Desk and a Canadian Tax Desk. Our U.S. Tax Desk handles QBI computation and Form 8995-A preparation, aggregation elections, rental trade-or-business and safe-harbor analysis, and entity and retirement planning around the threshold. See pricing or book a call.
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