# 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.

## Key takeaways

- Up to 20% of qualified business income from a pass-through business, also capped at 20% of taxable income (before the deduction) minus net capital gain.
- Permanent under the 2025 tax law. For 2026, a new $400 minimum deduction applies if you have at least $1,000 of QBI from businesses you materially participate in.
- 2026 threshold: $201,750 ($403,500 married filing jointly). Above it, W-2 wage and property limits phase in over $75,000 ($150,000 joint).
- It doesn't reduce self-employment tax, and it's taken on your Form 1040, not as a business expense.
- S corp owners: your salary isn't QBI. Employees' wages aren't either.

## 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.

**QBI deduction (at or below the threshold)**

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

Where:
- QBI = net qualified business income from your trades or businesses
- taxable income = taxable income figured before the QBI deduction
- net capital gain = net capital gain, including qualified dividends

> **Worked example: a sole-proprietor plumber, tax year 2026 (illustrative)**
>
> A plumber files single. After deducting half of self-employment tax and other adjustments tied to the business, QBI is $90,000. Taxable income before the QBI deduction is $110,000, with no capital gains.
>
> 20% of QBI = $18,000. 20% of taxable income = $22,000. The deduction is the lesser: **$18,000**.
>
> Taxable income of $110,000 is below the 2026 threshold of $201,750, so the W-2 wage and property limits don't apply. The deduction lowers income tax only; self-employment tax is still figured on the full net earnings.

## 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.

**Section 199A threshold and phase-in amounts**

| Filing status | 2025 threshold | 2025 phase-in ends | 2026 threshold | 2026 phase-in ends |
| --- | --- | --- | --- | --- |
| Married filing jointly | $394,600 | $494,600 | $403,500 | $553,500 |
| Married filing separately | $197,300 | $247,300 | $201,775 | $276,775 |
| All other returns (single, head of household) | $197,300 | $247,300 | $201,750 | $276,750 |

_Sources: IRS Instructions for Forms 8995 and 8995-A (2025) and Rev. Proc. 2025-32, section 4.26 (2026), checked 2026-10-12. Thresholds are based on taxable income before the QBI deduction._

### 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

**How the QBI deduction applies to common trades setups**

| Structure | What counts as QBI | Notes |
| --- | --- | --- |
| Sole proprietor / single-member LLC | Schedule C net profit, adjusted for items like the deductible part of SE tax | Most common setup for owner-operators |
| Partnership / multi-member LLC | Your share of business income | Fixed payments to a partner for services, paid regardless of profit, aren't QBI |
| S corporation | Your share of profit after your salary | Your [reasonable salary](https://www.brix.so/learn/reasonable-salary-s-corp) isn't QBI, but it counts as W-2 wages for the wage limit |
| C corporation | Not eligible | Income earned through a C corp doesn't qualify |
| W-2 employee (your techs) | Not eligible | Wages aren't QBI |

_Source: IRS Instructions for Form 8995 (2025) and IRS QBI deduction page, checked 2026-10-12._

## 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](https://www.brix.so/learn/self-employment-tax) is unchanged. That's also why the [S corp decision](https://www.brix.so/learn/s-corp-vs-llc-for-contractors) 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.

BRIX keeps your income and expenses categorized through the year and synced with QuickBooks, so the profit figure your CPA starts from is clean and current. BRIX doesn't calculate your QBI deduction, file returns or give tax advice.

- [Bookkeeping and tax help](https://www.brix.so/features/bookkeeping-taxes): Keeps expenses categorized, tracks 1099 subcontractors and sales tax, and reminds you of quarterly estimated tax dates. BRIX does not file taxes or give tax advice.
- [QuickBooks sync](https://www.brix.so/integrations/quickbooks): Syncs customers, invoices and payments with QuickBooks so the books match the jobs.

## Frequently asked questions

### Is the QBI deduction permanent?

Yes. The IRS says the 2025 tax law, which it calls the Working Families Tax Cuts (the One Big Beautiful Bill Act), made the qualified business income deduction permanent. It had been scheduled to expire after 2025.

### What is the QBI threshold for 2026?

For tax year 2026, the threshold is $201,750 of taxable income for single and most other filers, $201,775 for married filing separately, and $403,500 for married filing jointly. The phase-in range runs $75,000 above those amounts ($150,000 for joint filers).

### Do contractors qualify for the QBI deduction?

Most do, if they operate as a sole proprietorship, LLC taxed as a partnership or sole proprietorship, or S corporation. Building and repair trades aren't on the IRS list of specified service businesses, so the main limits above the threshold are the W-2 wage and property limits.

### Does the QBI deduction reduce self-employment tax?

No. The IRS states that the QBI deduction does not reduce net earnings from self-employment. It lowers taxable income for income tax only, so self-employment tax is figured on the same net earnings as before.

### What is the $400 minimum QBI deduction?

Starting with tax years beginning after 2025, taxpayers with at least $1,000 of qualified business income from active businesses they materially participate in get a minimum deduction of $400. Both amounts are scheduled for inflation adjustment after 2026.

### Is S corp salary included in QBI?

No. Reasonable compensation an S corporation pays you is excluded from qualified business income. Only your share of the profit after salary counts. The salary does count as W-2 wages for the wage limitation if your income is above the threshold.

### Which form do I use for the QBI deduction?

Use Form 8995 if your taxable income before the deduction is at or below the year's threshold and you're not a patron of an agricultural or horticultural cooperative. Otherwise use Form 8995-A. Either way, the deduction is claimed on your Form 1040.

## Related

- [S Corp vs. LLC for Contractors: Which Is Better?](https://www.brix.so/learn/s-corp-vs-llc-for-contractors)
- [What Is a Reasonable Salary for an S Corp Owner?](https://www.brix.so/learn/reasonable-salary-s-corp)
- [What Is Self-Employment Tax?](https://www.brix.so/learn/self-employment-tax)
- [Quarterly Estimated Taxes for Contractors: How They Work in 2026](https://www.brix.so/learn/quarterly-estimated-taxes-for-contractors)
- [What Are Payroll Taxes?](https://www.brix.so/learn/payroll-taxes)
- [Self-Employment Tax Calculator (2026)](https://www.brix.so/tools/self-employment-tax-calculator)
- [Taxes for Contractors: The 2026 Guide for Self-Employed Trades Owners](https://www.brix.so/guides/contractor-taxes)
- [Bookkeeping for contractors that keeps your books tax-ready all year](https://www.brix.so/features/bookkeeping-taxes)
- [Quarterly Estimated Tax Calculator for Self-Employed Contractors (2026)](https://www.brix.so/tools/quarterly-estimated-tax-calculator)
- [Mileage Deduction Calculator for Contractors (2026)](https://www.brix.so/tools/mileage-deduction-calculator)

## Sources

- [IRS — Qualified business income deduction](https://www.irs.gov/newsroom/qualified-business-income-deduction) (checked 2026-10-12)
- [IRS — Rev. Proc. 2025-32 (2026 inflation adjustments, section 4.26 and section 2.12), Internal Revenue Bulletin 2025-45](https://www.irs.gov/irb/2025-45_IRB) (checked 2026-10-12)
- [IRS — Understanding the Working Families Tax Cuts: business tax provisions](https://www.irs.gov/newsroom/understanding-the-working-families-tax-cuts-business-tax-provisions-youtube-video-text-script) (checked 2026-10-12)
- [IRS — Instructions for Form 8995 (2025)](https://www.irs.gov/instructions/i8995) (checked 2026-10-12)
- [IRS — Instructions for Form 8995-A (2025)](https://www.irs.gov/instructions/i8995a) (checked 2026-10-12)
- [IRS — Section 199A qualified business income deduction FAQs (A1, A18, A19)](https://www.irs.gov/newsroom/tax-cuts-and-jobs-act-provision-11011-section-199a-qualified-business-income-deduction-faqs) (checked 2026-10-12)

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Written by BRIX Editorial Team. Last updated 2026-10-12. General information, not tax, legal or financial advice.
Canonical: https://www.brix.so/learn/qbi-deduction