What Is the QBI Deduction (Section 199A) and Who Qualifies?

The qualified business income deduction, often called the 199A or pass-through deduction, is claimed on the owner's own return with Form 8995 or Form 8995-A, not on the business's return. It reduces taxable income rather than adjusted gross income, and it is available whether or not you itemize (IRC 63(b)(3); IRS QBI page). It is an income tax deduction only, so it does not lower self-employment tax (IRC 199A(f)(3)). Below: what P.L. 119-21 changed, the 2026 thresholds, what counts as QBI, the limits above the threshold, service businesses, S corporation salaries, three worked examples and which form to file.

How the QBI deduction is calculated

The deduction is the lesser of two amounts (IRC 199A(a), (b)(1)):

• The combined QBI amount: for each qualified trade or business, 20% of its QBI (limited above the threshold, as explained below), plus 20% of qualified REIT dividends and qualified publicly traded partnership income.
• 20% of taxable income, figured before the QBI deduction, after subtracting net capital gain (which includes qualified dividends for this purpose).

For a partnership or S corporation, the calculation happens at the owner level: each partner or shareholder takes their share of QBI, W-2 wages and qualified property into account on their own return (IRC 199A(f)(1)). The partnership or S corporation files no Form 8995; it reports the information to owners on an attachment to Schedule K-1 (Instructions for Form 8995).

What P.L. 119-21 changed

The deduction was scheduled to end after 2025. P.L. 119-21, signed July 4, 2025, rewrote section 199A(i). The section 70105 changes apply to tax years beginning after December 31, 2025, as the effective date note printed with the statute states.

The minimum deduction uses the material participation tests of section 469(h), and the IRS says meeting any one of the seven tests in Treas. Reg. 1.469-5T(a) is enough (IRS QBI page). Material participation is not required for the regular 20% deduction ( Instructions for Form 8995). Illustration: an owner with $1,800 of QBI from a side business she materially participates in would compute a $360 deduction at 20%; for 2026 the minimum raises it to $400.

2026 QBI thresholds and phase-in ranges

Taxable income before the QBI deduction decides which rules apply (IRC 199A(e)(1)). At or below the threshold, only the 20% and taxable income limits matter. Above it, the wage and property limits and the service-business phase-out start, and they apply in full at the top of the range (Rev. Proc. 2025-32, section 4.26).

For 2025 returns, including those on extension until October 15, 2026, the thresholds were $394,600 joint and $197,300 for other returns, with the old $100,000 and $50,000 ranges (Form 8995 (2025); Form 8995-A (2025)). The 2027 figures have not been published.

Who qualifies for the QBI deduction

Section 199A allows the deduction to taxpayers other than corporations (IRC 199A(a)). In practice that means individuals, and some trusts and estates, with income from a domestic business run as a sole proprietorship or through a partnership, S corporation, trust or estate; an LLC counts as whichever of those it is taxed as. Income earned through a C corporation or by working as an employee is not eligible (IRS QBI page; IRC 199A(d)(1)(B)). Beyond that, five rules shape what qualifies:

• It has to be a trade or business. The test comes from section 162: your primary purpose is income or profit, and you are involved with continuity and regularity. For an interest in a partnership or S corporation, the determination is made at the entity level (Instructions for Form 8995).
• Rentals can qualify. A rental that rises to the level of a section 162 trade or business counts, and Rev. Proc. 2019-38 gives a safe harbor for a rental real estate enterprise. Property rented or licensed to a commonly controlled business counts even when the rental alone would not be a trade or business (Treas. Reg. 1.199A-1(b)(14)).
• Only U.S. business income counts. Items must be effectively connected with a trade or business within the United States (IRC 199A(c)(3)(A)(i)).
• Former employees start with a presumption. If you were an employee and keep providing substantially the same services to that business as a contractor or partner, you are presumed to still be an employee for section 199A purposes for 3 years. The presumption can be rebutted with records such as contracts or partnership agreements (Instructions for Form 8995).
• Specified service businesses face their own limits once taxable income passes the threshold, covered below.

What counts as qualified business income

QBI is the net amount of qualified items of income, gain, deduction and loss from each qualified trade or business (IRC 199A(c)(1)). It is a net figure after the business's own expenses, and it is also reduced by deductions that appear on the owner's return but come from the business: the deductible part of self-employment tax, the self-employed health insurance deduction and retirement plan contributions, in proportion to the income from that business (Treas. Reg. 1.199A-3(b)(1)(vi)). These items are left out of QBI:

• Short-term and long-term capital gains and losses.
• Dividends, and interest income that is not properly allocable to the business.
• Annuities not received in connection with the business.
• Reasonable compensation an S corporation pays you, and guaranteed payments a partnership pays you for services.
• Payments to a partner for services outside the partner’s role as a partner.
• Wages you earn as an employee.
• Qualified REIT dividends and publicly traded partnership income, which get their own 20% component.
• Tips you deduct under section 224.
• Income not effectively connected with a trade or business in the United States.

If your businesses produce a net loss for the year, the QBI part of the deduction is zero and the loss is treated as a loss from a qualified business in the next year (IRC 199A(c)(2)). The Form 8995 instructions add that the carryforward keeps offsetting QBI in later years whether or not the business that produced it still exists.

Above the threshold: the W-2 wage and property limits

Once taxable income passes the threshold, the deduction for each business is capped at the greater of two amounts (IRC 199A(b)(2)):

• 50% of the W-2 wages the business pays, or
• 25% of those W-2 wages plus 2.5% of the unadjusted basis immediately after acquisition (UBIA) of its qualified property.

Inside the phase-in range the cap is phased in: 20% of QBI is reduced by a share of the amount by which it exceeds the cap, and that share equals how far taxable income has moved into the range (IRC 199A(b)(3)(B)). Example 2 below shows the steps. Above the range the cap applies in full, so a business that pays no W-2 wages and holds no qualified property produces no deduction there, because both amounts are zero.

What counts as W-2 wages

W-2 wages are the wages a business reports on Form W-2 plus elective deferrals, such as 401(k) contributions (IRC 199A(b)(4)(A); IRC 6051(a)(3), (8)). Only wages properly allocable to QBI count, and wages on a Form W-2 filed with the Social Security Administration more than 60 days after its due date, including extensions, are excluded (IRC 199A(b)(4)(B), (C)). Pay to statutory employees does not count either (Instructions for Form 8995-A).

What counts as qualified property

Qualified property is depreciable tangible property that the business holds at year-end and used during the year to produce QBI, for as long as its depreciable period lasts: the later of 10 years after it was placed in service or the last full year of its recovery period under section 168 (IRC 199A(b)(6)). UBIA is generally its basis on the placed-in-service date, and bonus depreciation under section 168(k) does not change the recovery period used for this test (Instructions for Form 8995-A). Land never counts, because it cannot be depreciated (Publication 946).

Pass-through owners and aggregation

Each partner or shareholder takes their own share of the business's W-2 wages and UBIA; in an S corporation that share is pro rata (IRC 199A(f)(1)(A)). An owner of several businesses applies the limits to each one separately unless they aggregate. The Form 8995-A instructions allow aggregation when the same person or group owns 50% or more of each business for most of the year, including its last day, all use the same tax year end, none is a specified service business, and the businesses meet two of three tests: the same or customarily bundled products or services, shared facilities or centralized functions, and operation in coordination with each other. Aggregations go on Schedule B of Form 8995-A every year and must be reported consistently.

Specified service trades or businesses (SSTBs)

A specified service trade or business performs services in health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services or brokerage services; invests, manages investments, trades or deals in securities, partnership interests or commodities; or has as its principal asset the reputation or skill of its employees or owners (IRC 199A(d)(2); IRC 1202(e)(3)(A)). Section 199A drops the words “engineering, architecture” from the section 1202 list, so engineering and architecture firms are not SSTBs. How much an SSTB owner loses depends on taxable income (IRC 199A(d)(3)):

• At or below the threshold, the business is treated like any other qualified business.
• Inside the phase-in range, only an applicable percentage of its QBI, W-2 wages and UBIA counts: 100% minus the share of the range taxable income has used up.
• Above the range, none of its QBI, W-2 wages or UBIA counts, for every owner, whether passive or active (Treas. Reg. 1.199A-5(a)(2)).

Two rules in the regulations keep the category narrower than it sounds. The reputation-or-skill clause covers only income from endorsing products or services, from licensing an individual's image, likeness, name, signature, voice or trademark, and from appearance fees (Treas. Reg. 1.199A-5(b)(2)(xiv)). And a business with gross receipts of $25 million or less is not an SSTB if less than 10% of those receipts come from specified services; above $25 million, the cutoff is 5% (Treas. Reg. 1.199A-5(c)(1)).

S corporation owners: salary is not QBI

Paying yourself a salary from an S corporation moves that money out of QBI. The wages are reasonable compensation, which section 199A excludes from QBI, and the corporation's deduction for them lowers the QBI reported on your K-1 (IRC 199A(c)(4)(A); Treas. Reg. 1.199A-3(b)(2)(ii)(H)). The same pay is wages reported on Form W-2, so above the threshold it also adds to the W-2 wages that set the cap: a higher salary shrinks QBI but can lift the limit. The IRS says an S corporation must pay a shareholder-employee reasonable compensation for services before making non-wage distributions (IRS, S corporation compensation), so the salary cannot be set by the QBI math alone. How salary, payroll tax and the S election fit together is covered in S corp vs LLC.

QBI deduction examples, below and above the threshold

Example 1. Taxable income before the deduction is $139,322, well under $403,500, so neither the wage limit nor the SSTB rules apply, and a consultant with the same numbers would get the same result. The deduction is 20% of $111,522, or $22,304, which is less than the $27,864 taxable income cap. In this illustration it lowers federal income tax by $4,907, all of it at the 22% rate. The couple claims it on Form 8995.

Example 2. Taxable income of $457,800 is $54,300 over the threshold, 36.2% of the way through the $150,000 range. Twenty percent of QBI is $80,000. The cap is $75,000, because 50% of $150,000 of W-2 wages is more than 25% of wages plus 2.5% of UBIA ($40,000). The deduction loses 36.2% of the $5,000 difference, or $1,810, leaving $78,190. If the business were an SSTB, only 63.8% of its QBI, wages and UBIA would count, and the same steps give $49,885.

Example 3. At $657,800 of taxable income the cap applies in full, so the deduction is $75,000 instead of $120,000. An SSTB at this income gets no QBI deduction at all. Examples 2 and 3 are claimed on Form 8995-A.

Form 8995 vs Form 8995-A

Both forms are filed by the owner with the individual return. The choice depends on taxable income before the QBI deduction and on whether you are a patron of an agricultural or horticultural cooperative (Instructions for Form 8995; Instructions for Form 8995-A).

On a 2025 return, the deduction from either form goes on Form 1040, line 13a (Instructions for Form 8995). For 2026, the IRS's early release draft of Form 8995, which is not for filing, adds a line for the minimum deduction for active qualified business income, and the deduction becomes the greater of that line or the regular computation (Form 8995 (2026) draft). Drafts can change before the final form is released.

Because taxable income before the deduction decides which form and which limits apply, the timing steps in the year-end tax planning checklist can matter here. Owners weighing a C corporation, whose income is not eligible, can compare the two in S corp vs C corp.

Sources: 26 U.S.C. 199A, qualified business income, with 2025 amendment notes; Public Law 119-21 (July 4, 2025), sections 70105 and 70201; IRS, Rev. Proc. 2025-32, sections 2.12 and 4.26 (2026 amounts); IRS, Qualified business income deduction (reviewed September 22, 2026); IRS, Form 8995 (2025); IRS, Instructions for Form 8995 (2025); IRS, Form 8995-A (2025); IRS, Instructions for Form 8995-A (2025); IRS, Form 8995 (2026) early release draft, not for filing; 26 CFR 1.199A-1, operational rules and definitions; 26 CFR 1.199A-3, qualified business income; 26 CFR 1.199A-5, specified service trades or businesses; 26 U.S.C. 63, taxable income defined; 26 U.S.C. 1202(e)(3), fields referenced by 199A(d)(2); 26 U.S.C. 6051(a), Form W-2 amounts used for W-2 wages; IRS Publication 946 (2025), How To Depreciate Property; IRS, S corporation compensation and medical insurance issues. Figures and rules checked against these sources on September 25, 2026. This is general information, not tax advice for your situation. Tax services are provided by licensed tax professionals under a separate engagement agreement. BEG does not provide tax advice.