What Is the QBI Deduction?

The qualified business income (QBI) deduction, or Section 199A deduction, lets owners of sole proprietorships, partnerships and S corporations deduct up to 20% of their qualified business income on their personal return. The 2025 tax law made it permanent. Below the 2026 income threshold of $201,750 ($403,500 married filing jointly), most trades owners face no wage or industry limits.

How does the QBI deduction work?

If your trades business is a sole proprietorship, a single-member LLC, a partnership or an S corporation, its profit flows to your personal return. The QBI deduction lets you deduct up to 20% of that qualified business income, whether you itemize or take the standard deduction. The IRS also notes that income earned through a C corporation, or as an employee, isn't eligible.

Deduction = lesser of (20% × QBI) or (20% × (taxable income − net capital gain))

What are the QBI income thresholds for 2026?

Below the threshold, the deduction is simple. Above it, two extra limits phase in: a cap based on W-2 wages and property, and (for specified service businesses) a phase-out. The 2025 tax law widened the phase-in range starting in 2026, from $50,000 to $75,000 for most filers and from $100,000 to $150,000 for joint filers.

What happens above the threshold?

Above the top of the phase-in range, the deduction for each business is limited to the greater of 50% of the W-2 wages it paid, or 25% of W-2 wages plus 2.5% of the unadjusted basis of qualified property (trucks, equipment and other depreciable property still in service). For a contractor with a payroll and a fleet, that limit is often not a problem. For a high-earning owner-operator with no employees and little equipment, it can cut the deduction sharply. Between the threshold and the end of the phase-in, the limit applies partially.

What's new for 2026: the $400 minimum

For tax years beginning after 2025, the law adds a minimum deduction of $400 for taxpayers with at least $1,000 of qualified business income from active trades or businesses, meaning ones in which you materially participate. Both amounts will be adjusted for inflation after 2026. It mostly matters for small side businesses: a weekend handyman with $1,500 of QBI would otherwise get a $300 deduction (20%), and the minimum lifts it to $400.

Are contracting businesses "specified service" businesses?

Generally no. Specified service trades or businesses (SSTBs) lose the deduction entirely above the phase-in range. The IRS lists fields such as health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services and investing. Building, repair and maintenance trades aren't on that list. If part of your income comes from something that might be, like paid consulting to other contractors, have a CPA look at how it's separated.

QBI deduction by business structure

QBI deduction vs. self-employment tax

These get confused because both hinge on business profit. The QBI deduction reduces income tax only. The IRS states that it "does not reduce net earnings from self-employment," so self-employment tax is unchanged. That's also why the S corp decision has two sides: an S corp election can cut employment tax, but the salary it requires shrinks QBI.

How do you claim it?

• Form 8995 if your taxable income before the QBI deduction is at or below the threshold for the year (and you're not a patron of an agricultural or horticultural cooperative).
• Form 8995-A if you're above the threshold or are a cooperative patron.
• Partnerships and S corporations don't take the deduction themselves; they report your share of QBI, W-2 wages and property basis on your Schedule K-1, and you claim it on your Form 1040.

Common mistakes

• Assuming it's 20% of revenue or gross profit. It's 20% of net qualified business income, capped by taxable income.
• Including the S corp salary in QBI. Reasonable compensation is excluded.
• Forgetting the taxable income cap. Big standard or itemized deductions can make 20% of taxable income the lower number.
• Ignoring the wage limit above the threshold. Owner-operators without payroll can lose much of the deduction at higher incomes.
• Thinking it lowers self-employment tax. It doesn't.