SSTB vs Non-SSTB: How the QBI Phase-Out Differs
Above the threshold an SSTB loses the deduction entirely; a non-SSTB keeps it subject to the wage and property limits — the two paths compared
Reviewed by the Fairlight Accounting cross-border tax team — U.S. & Canadian Tax Desks
Below the taxable-income threshold, SSTB and non-SSTB owners get the same 20 percent qualified business income deduction. Above it they diverge: an SSTB owner's deduction phases down to zero across the range, while a non-SSTB owner's deduction is limited to the greater of 50 percent of W-2 wages or 25 percent of wages plus 2.5 percent of qualified property.
On this page
What are the threshold and the range?
The threshold is a taxable-income figure (not business income), indexed annually and set separately for single and joint filers — US$201,750 and US$403,500 for 2026. The phase-out range runs from the threshold up to a ceiling; the 2025 legislation widened the range for years after 2025 (to US$75,000 for single filers and US$150,000 for joint filers, from US$50,000 and US$100,000, so the 2026 range tops out at US$276,750 and US$553,500), meaning the transition from full deduction to full limitation is spread over more income than before. Taxable income for this purpose is computed before the QBI deduction itself and includes everything on the return — wages, a spouse's income, investment income — not only the business.
The two paths compared
| Taxable income | SSTB owner | Non-SSTB owner |
|---|---|---|
| Below the threshold | Full 20 percent deduction; no wage or property limit | Full 20 percent deduction; no wage or property limit |
| Within the phase-out range | Deduction reduced proportionally toward zero as income moves through the range; the wage-and-property limit also phases in on the remaining amount | Wage-and-property limit phases in proportionally; deduction is full 20 percent reduced only by the phased-in portion of the limit |
| Above the range | No deduction — QBI, wages, and property from the SSTB are all disregarded | Deduction equals the lesser of 20 percent of QBI or the wage-and-property limit (greater of 50 percent of W-2 wages, or 25 percent of wages + 2.5 percent of UBIA) |
| Overall cap (both) | 20 percent of taxable income less net capital gain | 20 percent of taxable income less net capital gain |
The practical difference: a non-SSTB with employees or equipment almost always clears the limit and keeps most or all of the deduction at any income; a non-SSTB solo owner with no payroll and no property has a limit of zero above the range (the reason an S corporation salary, which counts as W-2 wages, matters — the coaching entity guide); and an SSTB owner above the range gets nothing no matter how much payroll or property the business has.
How does the SSTB phase-out work inside the range?
Two reductions apply at once. First, the "applicable percentage" — the share of the range the taxpayer's income has not yet reached — reduces the SSTB's QBI, W-2 wages, and UBIA proportionally (a taxpayer 40 percent of the way through the range counts only 60 percent of each). Second, the wage-and-property limit phases in on that reduced amount, as it does for a non-SSTB. The combined effect is a deduction that shrinks steeply as income rises through the range, which is why taxable income in the range is the most expensive place for an SSTB owner to be and why the threshold strategy — retirement contributions that pull income below the line (the coaching retirement guide) — is worth more here than anywhere else.
Can a business be part SSTB?
Not within one trade or business: the de minimis rule (10 percent of receipts below US$25 million; 5 percent above) either exempts the whole business or classifies the whole business as an SSTB. But a taxpayer can operate more than one trade or business, and each is classified separately — with the regulations' anti-abuse rule catching an SSTB that spins property or services off into a commonly owned entity: whatever that entity provides to an SSTB with 50 percent or more common ownership is treated as a separate SSTB (a building leased 90 percent to the owners' own dental practice is 90 percent SSTB). Genuine separation — different customers, books, staff, and operations — is what earns separate treatment (the SSTB guide).
What did the 2025 legislation change?
It made the QBI deduction permanent (it had been scheduled to expire after 2025), widened the phase-out range for years after 2025, and added a minimum deduction for taxpayers with modest 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 permanence removes the planning question of whether the deduction would exist at all; the wider range slows the phase-out for SSTB owners in the transition zone.
Worked example
Two single owners each with US$260,000 of taxable income, in the phase-out range, and US$200,000 of QBI. Owner A runs an accounting practice (SSTB) with two employees earning US$120,000 of W-2 wages. Owner B runs an HVAC company (non-SSTB) with the same wages. A's deduction: the applicable percentage reduces her QBI and wages first, then the wage limit phases in on the remainder — her deduction lands well under half of the US$40,000 she would get below the threshold. B's deduction: 20 percent of US$200,000 is US$40,000; the wage limit (50 percent of US$120,000 = US$60,000) is higher than that even fully phased in, so his deduction stays at US$40,000. Same income, same payroll, and A's classification cost her more than US$20,000 of deduction. A's fix is to bring taxable income down to the US$201,750 threshold: a retirement contribution of about US$58,250 does it, and because a self-employed contribution also reduces QBI, her deduction recovers to about US$28,350 rather than the full US$40,000 — still more than triple her in-range result.
Frequently asked questions
What happens to QBI above the threshold for an SSTB?
The deduction phases down across the range and is zero above it. The SSTB's income, wages, and property are disregarded entirely once taxable income exceeds the range's ceiling.
What are the QBI thresholds this year?
The threshold and range are indexed annually and differ for single and joint filers; the 2025 legislation widened the range for years after 2025. For 2026 the threshold is US$201,750 (single) or US$403,500 (joint), and the range is US$75,000 or US$150,000; the IRS publishes each year's figures in its annual inflation-adjustment revenue procedure.
Can a business be part SSTB?
Not within a single trade or business — the de minimis rule classifies the whole business one way or the other. Separate trades or businesses under common ownership are classified separately, subject to anti-abuse rules.
How does the 2025 law change the phase-out range?
It widened the range for years after 2025, spreading the reduction over more income, and made the deduction permanent. For 2026 the range is US$75,000 for single filers and US$150,000 for joint filers, up from US$50,000 and US$100,000.
Official sources
The IRS states: “The QBI Component is subject to limitations, depending on the taxpayer's taxable income which may include the type of trade or business, the amount of W-2 wages paid by the qualified trade or business, and the unadjusted basis immediately after acquisition (UBIA) of qualified property held by the trade or business.” — Internal Revenue Service, Qualified business income deduction, https://www.irs.gov/newsroom/qualified-business-income-deduction
The IRS Section 199A FAQs state: “The SSTB exception does not apply for taxpayers with taxable income at or below the threshold amount and is phased in for taxpayers with taxable income within the phase-in range. For taxpayers with taxable income above the phase-in range, no deduction is permitted with respect to any SSTB.” — 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 deduction computation on Form 8995-A, phase-out modeling for SSTB owners, S corporation wage planning for the limitation, and the retirement-contribution threshold strategy. See pricing or book a call.
Cross-border taxes, handled in one place
U.S. and Canadian filings prepared together by our U.S. and Canadian Tax Desks.
Book a free fit call