The QBI deduction (Section 199A) in 2026

If you own a pass-through business, you can knock up to 20% of its profit off your personal taxable income. That's the qualified business income deduction. Sole proprietors, LLC owners, partners and S corp shareholders all get it. C corps don't. It was written to end after 2025, but the 2025 tax law (Public Law 119-21) made it permanent.

It's a deduction, so it shrinks taxable income. It doesn't cut your tax bill dollar for dollar like a credit would. And it only touches income tax. Self-employment tax is figured without it.

The basic rule

The IRS QBI page puts it as up to 20% of qualified business income, limited to 20% of taxable income minus net capital gain. You take the smaller of the two.

Qualified business income is basically the business's net profit. Section 199A(c) leaves a few things out: investment income like capital gains, dividends and most interest, and the reasonable salary an S corp pays you. The salary part matters when you compare structures. If you run an S corp, you get the deduction on what's left after your salary, and the salary itself doesn't count.

2026 thresholds

Under a certain taxable income it's easy. You get 20%, whatever the business does and whether or not it has employees. Go over that line and two limits start to phase in. Rev. Proc. 2025-32, section 4.26, sets the 2026 figures.

So the phase-in range is $75,000 wide, or $150,000 on a joint return. It used to be $50,000 and $100,000. The statute widened it starting in 2026.

Limit 1: specified service businesses

A specified service trade or business (SSTB for short) loses the deduction bit by bit as taxable income climbs through the phase-in range. Past the top of the range it gets nothing. Section 199A(d)(2) defines the list:

• health
• law
• accounting
• actuarial science
• performing arts
• consulting
• athletics
• financial services and brokerage services
• investing and investment management, trading, or dealing in securities, partnership interests or commodities
• any business where the main asset is the reputation or skill of its employees or owners

Engineering and architecture are on the related list in Section 1202 but are carved out here, so they count as ordinary businesses for the QBI deduction.

Limit 2: W-2 wages and property

Above the threshold, the deduction for each business is also capped at the greater of:

• 50% of the W-2 wages the business pays, or
• 25% of those W-2 wages plus 2.5% of the unadjusted basis of its depreciable property.

A sole proprietor with no employees and little equipment has almost no wages to count. Above $276,750 of taxable income (single), that owner's deduction can drop to zero even outside the service list. An S corp owner's own salary counts as W-2 wages paid by the business, which is one reason higher-income owners sometimes come out ahead with an S corp.

The $400 minimum, new for 2026

There's a floor now. Under Section 199A(i), if you have at least $1,000 of qualified business income from businesses you materially participate in, your deduction is at least $400. Rev. Proc. 2025-32 confirms the figures, and they get adjusted for inflation after 2026. The IRS name for it is a mouthful: the Minimum Deduction for Active Qualified Business Income. Owners of small side businesses are the ones it mostly helps.

Worked example: below the threshold

A single sole proprietor has $100,000 of net profit in 2026 and no other income.

The cap on taxable income binds here, which is common for owners whose business is their only income. The standard deduction already shrank taxable income below profit.

Taxable income is far below $201,750, so the service list and wage limit don't apply. A consultant and a bakery owner with these numbers get the same deduction.

What this means for picking a structure

• A sole proprietor or default LLC owner gets the deduction on all business profit.
• An S corp owner gets it on profit after salary, and the salary can count toward the wage limit.
• A C corp owner gets none on corporate profit. Dividends are not qualified business income.

The calculator works the deduction out for each structure from your profit, filing status and whether your business is on the service list.