Updated for tax years 2025 and 2026. You may qualify for the qualified business income deduction (QBI deduction) if you file taxes as a self-employed taxpayer or a small business owner. The process is fairly simple, as long as your business income and the nature of your business make you eligible.
Note: The One Big Beautiful Bill (OBBB) is now also being referred to by lawmakers as the Working Families Tax Cut Act. You may see one or both names used here, but they refer to the same set of tax changes.
For tax year 2025, the QBI rules still use the original $50,000 phase-in range for most filers and the $100,000 range for joint filers. Beginning with tax year 2026, the OBBB widens those ranges and adds a new $400 minimum deduction.
What is qualified business income?
The IRS defines QBI as “the net amount from qualified items of income, gain, deduction, and loss from any qualified trade or business.” In plain terms, it’s generally the net income your qualified business earns, not including certain items such as employee wages, capital gains or losses, dividends, or interest not properly connected to the business.
What is the qualified business income deduction?
The QBI deduction, created under the Tax Cuts and Jobs Act (TCJA), lets eligible business owners deduct up to 20% of their qualified business income. It is also called the Section 199A deduction. With the passage of the OBBB, the QBI deduction is now a permanent part of the tax code. Starting with tax year 2026, the OBBB increased the phase-in range from $50,000 to $75,000 for single filers (and $100,000 to $150,000 for joint filers). The deduction itself remains 20% for most qualifying business owners.
What is the purpose of the QBI deduction?
The main purpose of the QBI deduction is to provide tax relief for eligible owners of pass-through businesses. These businesses generally do not pay federal income tax at the entity level; instead, qualifying income passes through to the owners’ individual returns.
What business types qualify for QBI?
Individuals and certain trusts or estates may claim the QBI deduction based on eligible income from the following business structures:
- Sole proprietorships (Schedule C filers)
- Partnerships
- S corporations
- Limited liability companies (LLCs) taxed as any of the above
- Certain trusts and estates
Basically, if your business income shows up on your individual tax return, it’s likely eligible for the deduction, unless you exceed certain income thresholds or run a business classified as a specified service trade or business (SSTB).
How does the QBI deduction work?
The QBI deduction lets you deduct up to 20% of your qualified business income from your taxable income. It has two parts:
- The QBI part lets you deduct 20% of your qualified business income, but it may be limited based on your W-2 wages paid or the unadjusted basis immediately after acquisition (UBIA) of property your business owns.
- The REIT/PTP part is also a 20% deduction, based on qualified real estate investment trust (REIT) dividends and publicly traded partnership (PTP) income, but this part isn’t limited by wages or property values.
You can claim the QBI deduction whether you take the standard deduction or itemize. However, the total QBI deduction is limited to the lesser of the QBI component plus the REIT/PTP component, or 20% of your taxable income before the QBI deduction, reduced by net capital gain and qualified dividends.
New starting in 2026: The OBBB added a minimum QBI deduction for eligible taxpayers. Your QBI deduction is generally at least $400 if you have at least $1,000 of aggregate QBI from active qualified trades or businesses in which you materially participate. If your regularly calculated deduction is greater than $400, you claim the higher amount. The $400 minimum and $1,000 eligibility threshold are fixed for 2026 and will be adjusted for inflation beginning in 2027.
What counts as qualified business income
- Net profit from your sole proprietorship (Schedule C), partnership, S corp, or LLC
- Other qualified items of income, gain, deduction, and loss from a U.S. qualified trade or business
Adjustments that reduce QBI (not income that adds to it):
- Deductible portion of self-employment tax
- Self-employed health insurance premiums
- Self-employed retirement plan contributions
- Other business deductions allocable to the trade or business
What doesn’t count as qualified business income
- C corporation income
- Employee wages, including reasonable compensation paid to an S corporation shareholder-employee
- Investment income (capital gains or losses, dividends)
- Interest income not related to the business
- Income not effectively connected with conducting a qualified trade or business in the United States, subject to limited exceptions
- Rental income, unless the activity qualifies as a trade or business under IRS rules
- Guaranteed payments received by a partner for services provided to the partnership
SSTBs vs. non-SSTBs: why your business type matters
SSTBs (specified service trades or businesses)
SSTBs are businesses that provide services in certain fields specifically identified in the tax law. For the QBI deduction, businesses in the following fields count as an SSTB:
- Health professionals (doctors, dentists, veterinarians)
- Legal services
- Accounting (CPAs, tax professionals)
- Consulting
- Brokerage services
- Performing arts (actors, entertainers)
- Athletes
- Actuarial science
- Financial services (wealth management, financial planning, retirement advising)
- Investing and investment management, trading, or dealing in securities, partnership interests, or commodities
If your business is an SSTB, your ability to take the QBI deduction phases out once your income passes a certain limit. However, you don’t need to worry about whether your business is an SSTB unless your total taxable income (before the QBI deduction) exceeds the annual threshold: $197,300 for single filers and $394,600 for joint filers in 2025. For 2026, the threshold is $403,500 for married couples filing jointly, $201,775 for married taxpayers filing separately, and $201,750 for all other filers. The corresponding phase-in ranges end at $553,500, $276,775, and $276,750, respectively.
Non-SSTBs
Non-SSTBs include many self-employed jobs or single-owner businesses, such as:
- Retail shops
- Restaurants and food trucks
- Childcare
- Rideshare services
- Construction companies
- Manufacturing
- Plumbers, electricians, mechanics
If your business is not an SSTB, the income limits still apply, but you may still qualify for a partial or full deduction depending on your situation.
Income limits and calculating the QBI deduction
Your ability to claim the full QBI deduction depends on your total taxable income (wages, capital gains, interest, etc.). These limits are based on your taxable income before the QBI deduction, not your business revenue or AGI alone.
Taxable income limits for tax year 2025:
| Filing status | Full deduction at or below | 2025 phase-in range | Phase-in range ends at |
|---|---|---|---|
| Single/Head of household/Qualifying surviving spouse | $197,300 | Above $197,300-$247,300 | $247,300 |
| Married filing separately | $197,300 | Above $197,300-$247,300 | $247,300 |
| Married filing jointly | $394,600 | Above $394,600-$494,600 | $494,600 |
Phase-in ranges are $50,000 / $100,000 above the threshold for 2024-2025. Starting in 2026, the OBBB expands them to $75,000 / $150,000:
| Filing status | Full deduction at or below | 2026 phase-in range | Phase-in range ends at |
|---|---|---|---|
| Single/Head of household/Qualifying surviving spouse | $201,750 | Above $201,750-$276,750 | $276,750 |
| Married filing separately | $201,775 | Above $201,775-$276,775 | $276,775 |
| Married filing jointly | $403,500 | Above $403,500-$553,500 | $553,500 |
Full deduction example
Below the threshold, both SSTBs and non-SSTBs can generally calculate the QBI component without applying the SSTB exclusion or W-2 wage and qualified-property limitation, though the overall taxable-income limitation and other QBI rules still apply. For example, say you have $20,000 of QBI, $80,000 of taxable income before the QBI deduction, $5,000 of net capital gain, and no qualified dividends. Twenty percent of your QBI is $4,000. Because that amount is less than 20% of your taxable income after subtracting the $5,000 net capital gain, your tentative deduction would be $4,000.
Phase-out range and above
- In the phase-in range? For non-SSTBs, the W-2 wage and UBIA limits begin to phase in, which may reduce your deduction. For SSTBs, the deduction itself begins to phase out and may be reduced to zero by the top of the range.
- Above the phase-in range? SSTBs are no longer eligible for the QBI deduction. Non-SSTBs may still qualify, but the deduction is capped based on the greater of 50% of the W-2 wages paid by your business, or 25% of the W-2 wages paid plus 2.5% of the business’s UBIA in all qualified property.
Which form to use
For 2025, most taxpayers use Form 8995 if their taxable income before the QBI deduction is $197,300 or less ($394,600 or less when married filing jointly) and they are not patrons of a specified agricultural or horticultural cooperative. Taxpayers above those thresholds generally use Form 8995-A. Having an SSTB by itself does not require Form 8995-A when taxable income is at or below the applicable threshold.
For 2026, taxpayers generally use Form 8995-A if taxable income before the QBI deduction exceeds $201,750 ($201,775 if married filing separately, or $403,500 if married filing jointly), or if they are patrons of a specified agricultural or horticultural cooperative. Otherwise, they generally use Form 8995.
Tips for maximizing the QBI deduction
- Stay below the income limits, especially if you’re an SSTB. Consider deferring income or increasing deductions to keep taxable income under the threshold.
- Pay yourself reasonable compensation if you’re an S corp owner. Only profits (not your wages/salary) qualify for the QBI deduction.
- Contribute to retirement plans or accelerate deductions to lower your taxable income. Note that retirement contributions reduce QBI but may still help by lowering taxable income.
Remember: the QBI deduction reduces income tax only. It does not reduce self-employment tax, net investment income tax, or Additional Medicare Tax.
FAQs
Do I have to itemize to claim the QBI deduction?
No. You can claim the QBI deduction whether you take the standard deduction or itemize deductions on your tax return.
Did the One Big Beautiful Bill change QBI deduction rules?
Yes. The Working Families Tax Cut Act made the deduction permanent, widened phase-in ranges starting in 2026, and added a $400 minimum for eligible active business owners with at least $1,000 of QBI. The 20% rate did not change, and 2025 returns still use the pre-OBBB phase-in ranges.
What is the $400 minimum QBI deduction, and who qualifies for it?
Beginning in tax year 2026, the QBI deduction is generally at least $400 if you have at least $1,000 of aggregate QBI from active qualified trades or businesses in which you materially participate. If your regularly calculated deduction is more than $400, you claim the higher amount. The $400 minimum and $1,000 eligibility threshold will be adjusted for inflation beginning with tax year 2027.
Can I claim the QBI deduction for multiple businesses?
Yes. QBI is generally calculated for each eligible business, although qualifying businesses may sometimes be aggregated. The amounts are then combined to determine your overall QBI deduction, and a loss from one business can reduce QBI from another.
The bottom line
The QBI deduction can help you reduce your tax bill as a small business owner, but it comes with some fine print. Knowing how your business type, income level, and expenses affect your eligibility can make a big difference at filing time. Thresholds and phase-in ranges change each year with inflation, so check the current year’s IRS revenue procedure before filing.
This article is for informational purposes only and not legal or financial advice.
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The OBBB is now also being referred to by lawmakers as the Working Families Tax Cut Act. You may see one or both names used here, but they refer to the same set of tax changes.