Updated for tax years 2025 and 2026.
You may qualify for the qualified business income deduction (QBI deduction) if you’re filing taxes as a self-employed taxpayer or as a small business owner. The best part about QBI deduction? The process to take this tax deduction 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 talk, 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 that is 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. This deduction is also called the Section 199A deduction because it is found in Section 199A of the Internal Revenue Code, which was added by the TCJA.
With the passage of the One Big Beautiful Bill (OBBB), the QBI deduction is now a permanent part of the tax code, meaning it’s here to stay for future tax years. OBBB made the QBI deduction permanent and, starting with tax year 2026, 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 an SSTB (more on that soon).
How does the QBI deduction work?
The QBI deduction lets you deduct up to 20% of your qualified business income from your taxable income.
The QBI deduction actually has two parts — one for QBI, and one for certain investments like qualified real estate investment trust (REIT) dividends and publicly traded partnership (PTP) income:
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 REIT dividends and 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, generally under the Section 469 passive-activity rules. 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?
Some examples of qualified business income include:
What counts as QBI:
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?
Not everything in your business’s financial world counts toward QBI. The following are examples of excluded items:
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 that is 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
Check out the IRS website for a more extensive list of what is not included in QBI.
SSTBs vs. non-SSTBs: Why your business type matters
Here’s where the QBI deduction gets a little more complicated. The IRS separates businesses into two big buckets: SSTBs and non-SSTBs.
SSTBs (specified service trades or businesses)
SSTBs are businesses that provide services in certain fields specifically identified in the tax law, such as health, law, accounting, consulting, financial services, and performing arts. The rules also include a narrowly defined category involving the reputation or skill of one or more employees or owners.
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 falls into the SSTB category, your ability to take the QBI deduction phases out once your income passes a certain limit, which we’ll cover below.
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.
Read the full IRS definition of an SSTB.
Non-SSTBs
Here are some examples of non-SSTBs. This category tends to include many self-employed jobs or single-owner businesses:
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.). If you’re over the limit, your QBI deduction might phase out or disappear altogether.
Here’s the breakdown of a taxpayer’s taxable income limits for tax year 2025:
Note: These limits are based on your taxable income before the QBI deduction, not your business revenue or AGI alone.
Phase-in ranges are $50,000 / $100,000 above the threshold for 2024–2025. Starting in 2026, OBBBA expands them to $75,000 / $150,000.
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. However, 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 examples
In the phase-in range?
Non-SSTBs: the W-2 wage and UBIA limits begin to phase in, which may reduce your deduction.
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: You may still qualify, but the deduction is capped based on the greater of:
50% of the W-2 wages paid by your business
25% of the W-2 wages paid plus 2.5% of the business’s UBIA in all qualified property
Sound confusing? No worries — if you use TaxAct® to file your self-employed or small business taxes, we’ll walk you through the QBI deduction calculation step-by-step, no matter what your business type is.
How to claim the QBI deduction with TaxAct
How you claim the qualified business income deduction using TaxAct depends on what type of business you have. We’ve linked detailed instructions for each business type below:
For 2025, most taxpayers use Form 8995 if their taxable income before the QBI deduction is $197,300 or less, or $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
A few strategies can help you get (or keep) that 20% QBI deduction. Here are some ideas to consider:
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 your deductions to lower your taxable income and potentially qualify for the full deduction. Note that retirement contributions reduce QBI but may still help by lowering taxable income.
Work with a tax professional or use tax software (like TaxAct!) that automatically calculates your QBI deduction based on your business details.
Remember: the QBI deduction reduces income tax only. It does not reduce self-employment tax, net investment income tax, or Additional Medicare Tax.
FAQs
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 when it’s time to file your income tax return.
Thresholds and phase-in ranges change each year with inflation — check the current year’s IRS revenue procedure before filing.
Want help figuring it out? TaxAct makes it easy to claim the QBI deduction and keep your small business taxes stress-free.
This article is for informational purposes only and not legal or financial adviceThis article is for informational purposes only and not legal or financial advice.
All TaxAct offers, products and services are subject to applicable terms and conditions.
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.
Citations
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