The QBI Deduction
Section 199A

Introduction & Overview

What every business owner needs to know about this powerful deduction — and why it matters more than ever.

What Is the QBI Deduction (Section 199A)?

The Qualified Business Income deduction — officially codified as Section 199A of the Internal Revenue Code — allows eligible business owners to deduct up to 20% of their qualified business income from their taxable income (made permanent by the OBBBA). If you earn $300,000 through a pass-through business, this deduction could reduce your taxable income by up to $60,000 — potentially saving you $13,000 to $22,000 in federal income taxes depending on your bracket.

The deduction is available to owners of sole proprietorships, partnerships, S corporations, and certain trusts and estates. It also applies to qualified REIT dividends and publicly traded partnership (PTP) income. Importantly, the deduction is taken on your personal return (Form 1040, Line 13) — the business entity itself does not claim it.

This is a deduction that reduces taxable income directly. You can claim it whether you take the standard deduction or itemize. It does not, however, reduce your self-employment tax or adjusted gross income.

Why It Was Created: The TCJA Context

When the Tax Cuts and Jobs Act (TCJA) was signed into law in December 2017, it slashed the corporate tax rate from a top rate of 35% down to a flat 21%. That was great news for C corporations — but it created a significant disparity for the millions of businesses structured as pass-through entities (S corps, partnerships, sole proprietorships), where income flows through to the owner's personal return and is taxed at individual rates as high as 37%.

Section 199A was Congress's answer: a deduction designed to bring effective tax rates for pass-through business owners closer to parity with C corporation shareholders. The OBBBA made the 20% deduction permanent (the increase to 23% proposed in the House draft was dropped from the final law). For a business owner in the 37% bracket, the deduction effectively reduces the top rate on qualified business income to 29.6%.

The Big News: Section 199A Is Now Permanent

When the QBI deduction was enacted in 2017, it came with a built-in expiration date: December 31, 2025. For years, business owners and tax professionals planned around the uncertainty of whether Congress would extend it.

That uncertainty ended on July 4, 2025, when President Trump signed the One Big Beautiful Bill Act (OBBBA) into law. The OBBBA made several important changes to Section 199A, effective for tax years beginning after December 31, 2025:

• Permanent extension — the sunset date was removed entirely. The QBI deduction is now a permanent part of the tax code.
• Expanded phase-out ranges — the phase-in range for limitations increased from $100,000 to $150,000 for joint filers, and from $50,000 to $75,000 for all other filers.
• New $400 minimum deduction — active business owners with at least $1,000 in QBI from businesses where they materially participate are guaranteed a minimum deduction of $400 (indexed for inflation starting 2027).

For the 2025 tax year, the original TCJA rules still apply. The OBBBA changes take effect beginning with the 2026 tax year. Throughout this guide, we cover both sets of rules so you can plan accordingly.

Eligibility Requirements

Who qualifies, who doesn't, and what counts as "qualified business income."

Who Qualifies for the QBI Deduction

The QBI deduction is available to individuals, trusts, and estates that have qualified business income from one or more pass-through entities or sole proprietorships. The key is that the income must pass through to your individual tax return.

• Sole proprietorships — income reported on Schedule C
• S corporations — your share of income from Schedule K-1
• Partnerships — your share of income from Schedule K-1 (including multi-member LLCs taxed as partnerships)
• Single-member LLCs — treated as a sole proprietorship by default (Schedule C), or can elect S corp treatment
• Trusts and estates — to the extent the trust or estate has QBI allocated to it
• REIT dividends — qualified dividends from Real Estate Investment Trusts
• Publicly traded partnership (PTP) income — your share of qualified PTP income

Who Does NOT Qualify

• C corporations — they already benefit from the flat 21% corporate rate
• W-2 employees — wages, salaries, and other employee compensation are excluded
• Reasonable compensation paid by an S corp — the salary you pay yourself as an S corp owner is excluded from QBI (only the remaining profit distributions qualify)
• Guaranteed payments to partners — payments for services or capital use under Section 707(c) are excluded

What Counts as "Qualified Business Income"

QBI is defined as the net amount of qualified items of income, gain, deduction, and loss from any qualified trade or business. Think of it as your ordinary business profit — but with some important exclusions.

Included in QBI: ordinary business income, ordinary business deductions directly connected to the business, the deductible portion of self-employment tax, self-employed health insurance deductions, and deductions for contributions to qualified retirement plans (SEP, SIMPLE, Solo 401(k)).

Excluded from QBI: capital gains and losses, interest income not allocable to the business, dividend income, annuity income (unless received in the ordinary course of business), reasonable compensation paid by an S corporation, guaranteed payments to partners, and income earned outside the United States.

Income Thresholds & Phase-Out Rules

The income levels that determine how much of the QBI deduction you can claim — and how the OBBBA changed them.

The amount of your QBI deduction depends heavily on your total taxable income (before the QBI deduction). The tax code creates three "buckets" of income that determine which rules apply.

2025 Tax Year Thresholds (Current TCJA Rules)

2026 Tax Year Thresholds (New OBBBA Rules)

Starting with the 2026 tax year, the OBBBA expands the phase-out ranges significantly. The base threshold amounts remain the same (subject to inflation adjustments), but the range over which limitations phase in is 50% wider:

*Projected amounts. Exact 2026 thresholds will be set by IRS inflation adjustments. The key change is the range width: $150,000 for MFJ (up from $100,000) and $75,000 for others (up from $50,000).

The SSTB Rules

If you're in a "Specified Service Trade or Business," these rules could eliminate your deduction entirely — or preserve it with the right planning.

What Is an SSTB?

A Specified Service Trade or Business (SSTB) is a trade or business involving the performance of services in certain professional fields. The rationale: these professions derive their value primarily from the skill and knowledge of individuals — rather than from capital investment or employee labor.

If your business is an SSTB and your taxable income exceeds the threshold, your QBI deduction is progressively reduced and eventually eliminated entirely. Non-SSTB businesses face limitations too, but they can still claim a deduction based on W-2 wages and property. SSTBs face a hard cliff — above the phase-out range, the deduction drops to zero.

Complete SSTB List

Safe Harbor Professions — NOT SSTBs

Despite what you might assume, several professions are specifically excluded from SSTB classification:

• Engineers — specifically exempted by the regulations
• Architects — specifically exempted by the regulations
• Real estate agents and brokers
• Insurance agents and brokers
• Bankers (non-investment banking)
• Property managers

W-2 Wage & Property Limitations

For high-income non-SSTB business owners, the deduction is capped by wages paid and property owned.

When These Limits Apply

If your taxable income is above the phase-out range and your business is not an SSTB, the W-2 wage and qualified property limitations cap your maximum QBI deduction.

The Two-Part Test

Your QBI deduction for each business cannot exceed the greater of:

— OR —

UBIA — Unadjusted Basis Immediately After Acquisition

UBIA is the original purchase price of tangible, depreciable property held and used in your business at the close of the tax year:

• Includes buildings, equipment, machinery, furniture, vehicles
• Uses the original cost, not current depreciated value
• Property must still be within its depreciable period
• Land does not qualify — it is not depreciable

Calculating Your QBI Deduction

Step-by-step walkthrough of the formulas — from the simple case to multi-business aggregation.

The Basic Formula (Below the Threshold)

Phase-Out Calculation (Within the Range)

Multiple Businesses: Aggregation Rules

If you own multiple businesses, the QBI deduction is calculated separately for each. However, you can aggregate businesses that share common ownership (50%+) and at least two of three commonality factors: centralized purchasing, shared facilities/equipment, or shared administrative services.

Why aggregate? A business with high wages but low QBI can "share" its wage capacity with a business that has high QBI but low wages — dramatically increasing your combined deduction.

Calculation Examples

Real-world scenarios that show how the QBI deduction works in practice.

Strategies to Maximize Your QBI Deduction

Proactive planning can mean the difference between a full deduction and no deduction at all.

Income Management Strategies

Since the QBI deduction thresholds are based on taxable income, reducing your taxable income is the most direct way to stay below the threshold or within a favorable phase-out position.

Entity Structure Optimization

Wage & Property Strategies

Special Situations

Unique rules for real estate, trusts, PTPs, and other specific scenarios.

Real Estate Investors

The Safe Harbor (Rev. Proc. 2019-38)

A rental real estate activity is automatically treated as a trade or business if you spend at least 250 hours/year on the rental activity. Hours include advertising, tenant screening, negotiating leases, managing repairs, collecting rent, and bookkeeping.

Self-Rental Arrangements

Renting property to your own business (e.g., owning the building your S corp operates from) automatically qualifies for QBI purposes — even if it doesn't meet the safe harbor. The rental income is QBI, and the building's UBIA counts toward the property limitation.

REIT Dividends

Qualified REIT dividends receive the 20% deduction with no wage/UBIA limitations and no SSTB restrictions. This makes REIT investments particularly tax-efficient for high-income individuals.

Tax Forms & Compliance

Which forms to file, where the deduction appears, and common mistakes to avoid.

Form 8995 — Simplified Computation

Use this if taxable income is at or below the threshold ($197,300 single / $394,600 MFJ for 2025) and you're not a cooperative patron. A straightforward one-page form: list QBI from each business, calculate 20%, apply the taxable income cap.

Form 8995-A — Standard Computation

Required when income exceeds the threshold, or when you need wage/UBIA limitations, SSTB phase-outs, aggregation, or loss carryforwards. Includes supplemental schedules: Schedule A (SSTBs), Schedule B (Aggregation), Schedule C (Loss Netting/Carryforward), Schedule D (Cooperatives).

Where QBI Appears on Form 1040

The QBI deduction is reported on Line 13 of Form 1040. It reduces taxable income directly — it's not an above-the-line deduction (doesn't reduce AGI) and it's not an itemized deduction.

Common Filing Mistakes

• Including reasonable compensation in QBI — S corp owner wages must be excluded.
• Using Form 8995 instead of 8995-A when above the threshold.
• Forgetting loss carryforwards from prior years.
• Failing to analyze aggregation when owning multiple businesses.

Frequently Asked Questions

Glossary of Key Terms

Resources & Next Steps

IRS Guidance & Official Resources

For authoritative guidance, refer to the IRS QBI Deduction overview page, the Instructions for Form 8995-A, and Revenue Procedure 2019-38 for the rental real estate safe harbor.

When to Consult a Professional

If your taxable income is near the threshold, you own an SSTB, you have multiple businesses, or you're making entity structure decisions — the QBI deduction is complex enough that professional guidance almost always pays for itself. A $2,000 tax planning engagement that preserves a $40,000 deduction is a 20x return on investment. Consider S-Corp optimization as a complementary strategy, explore our tax planning services, or learn how to find a tax strategist who specializes in QBI planning.