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Key Facts
- Federal deduction: Section 199A can allow eligible noncorporate taxpayers to deduct up to 20% of qualified business income.
- Not a business deduction: The deduction is claimed by an eligible owner, trust, or estate after business profit is calculated; partnerships and S corporations pass information to owners.
- Important limits: Taxable income, net capital gain, W-2 wages, qualified property, and specified-service-business rules can reduce the result.
- Excluded amounts: Employee wages, S corporation reasonable compensation, and partnership guaranteed payments generally are not QBI.
- New for 2026: The deduction is permanent, and the $400 minimum rule requires at least $1,000 of aggregate QBI from active qualified trades or businesses in which the taxpayer materially participates under section 469(h).
The qualified business income deduction—often called the QBI deduction or section 199A deduction—can reduce taxable income for owners of pass-through businesses. “Up to 20%” is only a starting point. The calculation depends on what income qualifies, the taxpayer’s taxable income, capital gains, the type of business, wages, property, losses, and information reported by each entity.
Who may claim the QBI deduction?
Individuals and some trusts and estates may qualify when they have income from a domestic qualified trade or business. Common sources include sole proprietorships, partnerships, S corporations, and certain trust or estate interests. A C corporation does not claim the section 199A deduction.
A partnership or S corporation also does not take the owner’s deduction on the entity return. Instead, it reports section 199A items to partners or shareholders, usually with Schedule K-1 information, and each owner applies taxpayer-level limits.
What qualified business income includes
QBI generally consists of qualified income, gain, deductions, and losses from a U.S. trade or business that are included in taxable income. Ordinary business profit can qualify, but the Schedule C or K-1 number is not automatically the final QBI amount. Related deductions—including the deductible part of self-employment tax, self-employed health insurance, business interest, and qualified retirement-plan contributions—can affect QBI.
QBI generally excludes employee wages, reasonable compensation paid by an S corporation, guaranteed payments to partners, capital gains and losses, dividends, and interest not properly allocable to the business. Qualified REIT dividends and publicly traded partnership income have separate components in the section 199A calculation.
Worker classification therefore matters. A 1099 contractor may have business income, while ordinary W-2 employee compensation is excluded from QBI.
The basic calculation
The QBI component generally begins with 20% of qualified business income from each qualified trade or business. The overall deduction also can include 20% of qualified REIT dividends and qualified publicly traded partnership income. The total is limited to 20% of taxable income before the QBI deduction, reduced by net capital gain.
Example: a sole proprietor has $80,000 of QBI and no relevant loss carryforward. Twenty percent is $16,000. If 20% of taxable income minus net capital gain is only $13,000, the taxable-income limitation generally caps the deduction at $13,000 before considering any other applicable rule.
Higher-income limitations
Above the annually adjusted taxable-income threshold, the deduction for a non-SSTB can be limited by W-2 wages paid by the business and the unadjusted basis immediately after acquisition of qualified property. The limitation phases in over a range rather than necessarily applying all at once.
A specified service trade or business, or SSTB, includes fields such as health, law, accounting, consulting, financial services, brokerage services, athletics, and performing arts, along with certain reputation-or-skill businesses. An SSTB may qualify below the threshold, be partially allowed within the phase-in range, and be excluded above the top of that range.
Thresholds are indexed annually, so a 2025 Form 8995 instruction amount should not be used as a 2026 amount without checking the applicable year’s form and guidance.
2026 changes
Legislation enacted in 2025 made the section 199A deduction permanent. For tax years beginning after December 31, 2025, the phase-in range is wider, and section 199A includes a new minimum deduction rule. The statute requires at least $1,000 of aggregate QBI from active qualified trades or businesses—trades or businesses in which the taxpayer materially participates under section 469(h)—for the $400 minimum deduction; those dollar amounts begin inflation adjustments after 2026.
The minimum is not a universal $400 credit and does not convert passive-business QBI, nonqualifying wages, or investment income into the active QBI used for this rule. The taxpayer must otherwise satisfy section 199A.
Losses, multiple businesses, and aggregation
A net qualified business loss generally carries forward and reduces positive QBI in a later year. Losses suspended under other Code provisions enter the QBI calculation when they are allowed in computing taxable income, and records must preserve their qualified and nonqualified portions.
Each business ordinarily is tested separately. Qualifying commonly owned businesses may be aggregated if ownership, tax-year, and operational-integration conditions are met. Aggregation affects the combined QBI, W-2 wages, and qualified-property limits and generally must be reported consistently in later years.
Forms and records
Form 8995 is the simplified computation form for eligible taxpayers within its requirements. Form 8995-A handles more complex calculations, including higher-income wage/property limits, SSTBs within the phase-in range, aggregation schedules, and other special rules.
- Keep Schedules K-1 and every attached section 199A statement.
- Reconcile Schedule C income with deductions that adjust QBI.
- Track QBI losses separately from losses suspended under other provisions.
- Retain payroll records and qualified-property basis records when limitations apply.
- Document any aggregation and apply it consistently.
This article addresses the federal deduction. State taxable income may conform to, modify, or disregard section 199A, so a federal result does not prove the state result.
