Business owners
Qualified business income (QBI) deduction
The QBI deduction, section 199A, lets owners of sole proprietorships, partnerships, LLCs and S corporations deduct up to 20% of their business profit. The July 2025 tax law made it permanent, and from 2026 it widens the income ranges and adds a $400 minimum deduction.
How much it is
The deduction is generally the smaller of two amounts: 20% of your qualified business income, plus 20% of qualified REIT dividends and publicly traded partnership income, or 20% of your taxable income minus net capital gain. You take it whether or not you itemize.
It lowers income tax only. It does not reduce self-employment tax, and it comes after adjusted gross income, so it does not lower Illinois tax, which starts from federal AGI.
Wages from a job and income earned through a C corporation do not count.
Example: a self-employed driver
A single filer has $60,000 of Schedule C profit in 2026 and no other income. Qualified business income is the profit minus the deductible half of self-employment tax, about $4,239, so it is $55,761, and 20% of it is $11,152.
But taxable income before the deduction is $55,761 minus the $16,100 standard deduction, or $39,661, and 20% of that is $7,932. The smaller amount wins: the QBI deduction is $7,932.
The income limits
Below the threshold, the deduction is simple and Form 8995 is used. Above it, two limits phase in over the next $75,000 ($150,000 joint) and Form 8995-A is used:
Specified service businesses, such as health, law, accounting, consulting, financial services, athletics and performing arts, lose the deduction gradually and get none above the top of the range. Other businesses are limited to the greater of 50% of the W-2 wages they pay, or 25% of wages plus 2.5% of the original cost of their qualified property.
| Year | Threshold, single | Fully phased in, single | Threshold, joint | Fully phased in, joint |
|---|---|---|---|---|
| 2026 | $201,750 | $276,750 | $403,500 | $553,500 |
| 2025 | $197,300 | $247,300 | $394,600 | $494,600 |
The new $400 minimum
From 2026, if you have at least $1,000 of qualified business income from businesses you actively run, meaning you materially participate in them, your deduction is at least $400. Both amounts rise with inflation after 2026. It helps people with small side businesses whose deduction would otherwise be tiny.
S corporation owners
The salary an S corporation pays its owner is wages, not qualified business income. Each extra dollar of salary adds payroll tax and takes a dollar out of the profit the 20% applies to, but the salary has to be reasonable for the work, so the level is a trade-off worth working out each year. Above the threshold, the wages the S-Corp pays can also be what keeps the deduction from being limited.
Make the most of the 20% deduction
For S-Corp owners and growing businesses, the QBI deduction depends on salary, wages and timing. Our tax planning assessment works it out on your own numbers. $195, in Naperville, IL, by phone or by Zoom.
Questions people ask
What is the qualified business income deduction?
A deduction of up to 20% of the profit from a sole proprietorship, partnership, LLC or S corporation, plus 20% of qualified REIT dividends and PTP income, limited to 20% of taxable income minus net capital gain.
Is the QBI deduction permanent?
Yes. It was set to end after 2025, but the July 2025 tax law made it permanent and added a $400 minimum deduction from 2026.
What is the QBI income limit for 2026?
$201,750 of taxable income for single filers and $403,500 for joint filers. Above that, service-business and wage limits phase in until $276,750 single or $553,500 joint.
Does the QBI deduction reduce self-employment tax?
No. It reduces income tax only. Self-employment tax is figured on net earnings before it.
Do I need to itemize to get the QBI deduction?
No. It is taken in addition to the standard deduction or itemized deductions.
Where these rules come from
- IRS: Qualified business income deduction
- IRS Rev. Proc. 2025-32: 2026 inflation adjustments (section 4.26)
- IRS: Instructions for Form 8995
- IRS: Instructions for Form 8995-A
General information, current when written, not advice about your situation. Fees and forms change; the official pages above are the authority.