QBI Deduction (Section 199A): 2026 Thresholds and Examples

Quick answer: The QBI deduction (Section 199A) lets owners of pass-through businesses deduct up to 20% of qualified business income. It is now permanent. For 2026, owners with taxable income under $201,750 (single) or $403,500 (joint) get the full deduction, even in service fields. Above those levels, wage limits and specified service rules phase in.

For freelancers, sole proprietors, partners and S corporation owners, this deduction is one of the most valuable tax breaks available. It was due to end after 2025, but the One Big Beautiful Bill Act made it permanent and improved it for smaller businesses. This guide explains who qualifies, what counts as qualified business income, the 2026 thresholds, how specified service businesses are treated, and two worked examples.

Important: This is general information, not tax advice. The QBI rules have many technical details, including aggregation, rental real estate and losses carried from earlier years. Check with a qualified tax adviser before relying on these figures.

What is the QBI deduction?

The qualified business income deduction allows eligible taxpayers to deduct up to 20% of their qualified business income (QBI) from a qualified trade or business, plus 20% of qualified REIT dividends and publicly traded partnership income. It is claimed on your personal return, so it applies to:

• Sole proprietors and single-member LLCs filing Schedule C
• Partners in partnerships and multi-member LLCs
• Shareholders in S corporations
• Some trusts and estates

The business must be a qualified trade or business carried on in the United States. Performing services as an employee is not a trade or business for this purpose, which is why wages never count. C corporations do not get it, because they already pay a flat 21% corporate rate. The deduction is available whether you itemize or take the standard deduction, but it does not reduce adjusted gross income or self-employment tax.

What changed in 2026: permanent and broader

The One Big Beautiful Bill Act made three changes to Section 199A:

1. Permanence. The deduction no longer expires, and the rate stays at 20%.
2. Wider phase-in ranges. Above the threshold, the limits now phase in over $75,000 of taxable income for single filers and $150,000 for joint filers, up from $50,000 and $100,000.
3. A $400 minimum deduction. From 2026, if you materially participate in an active business and have at least $1,000 of QBI from active businesses, your deduction is at least $400. Both figures are set to be indexed for inflation after 2026.

For a summary of the other business changes in the same law, see our overview of the One Big Beautiful Bill for small businesses.

What counts as qualified business income?

QBI is the net amount of income, gain, deduction and loss from a qualified trade or business conducted in the United States. For a sole proprietor, the starting point is the net profit on Schedule C (see our guide to Schedule C for freelancers), reduced by:

• The deductible half of self-employment tax
• Self-employed health insurance deductions
• Contributions to self-employed retirement plans, such as a SEP-IRA or solo 401(k)

These items are not QBI:

• Wages you earn as an employee
• Reasonable compensation an S corporation pays you
• Guaranteed payments from a partnership for services
• Capital gains and losses, and most interest and dividend income

Business deductions such as depreciation also reduce QBI. Writing off a large equipment purchase with Section 179 or bonus depreciation lowers your QBI and therefore your 20% deduction, which is worth keeping in mind; our guide to Section 179 vs bonus depreciation covers the trade-offs.

2026 QBI deduction thresholds

Whether the extra limits apply depends on your taxable income before this deduction. The 2026 figures from IRS Revenue Procedure 2025-32 are:

Filing status	Threshold	Phase-in range	Limits apply in full above
Single, head of household	$201,750	$75,000	$276,750
Married filing separately	$201,775	$75,000	$276,775
Married filing jointly	$403,500	$150,000	$553,500

Below the threshold, the deduction is simply the lesser of 20% of QBI or 20% of taxable income (minus net capital gain). Above it, two extra rules come into play.

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

For each business, the deduction is limited to the greater of:

• 50% of the W-2 wages the business paid, or
• 25% of W-2 wages plus 2.5% of the unadjusted basis of qualified property (UBIA), meaning the original cost of depreciable assets still within their depreciation period.

A one-person consultancy with no employees and few assets has almost no wages or property, so once income is above the full phase-in level, its deduction can drop to zero. Within the phase-in range, the limit applies gradually.

Specified service trades or businesses (SSTBs)

Specified service trades or businesses get special treatment. These include businesses in health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, investing and investment management, trading, dealing in securities, and any business where the main asset is the reputation or skill of its owners or employees. Engineering and architecture are specifically excluded.

The rules for SSTB owners work like this:

• Below the threshold: full deduction, just like any other business.
• Inside the phase-in range: only a shrinking percentage of QBI, wages and property is counted.
• Above the range: no deduction at all from the SSTB.

Many freelancers are not SSTBs. A web developer, graphic designer, copywriter, photographer or tradesperson is usually not in a listed field. Consultants, accountants, lawyers and health practitioners are. If you are unsure, the Treasury regulations give detailed definitions, and an adviser can review your activities.

Worked example 1: a freelancer below the threshold

Sam is a single freelance consultant with Schedule C net profit of $130,000 in 2026 and no other income. Consulting is an SSTB, but Sam is under the threshold, so the SSTB rule does not matter.

Step	Calculation	Amount
Net profit	Schedule C	$130,000
Deductible half of SE tax	$130,000 x 92.35% x 15.3% / 2	About $9,185
Qualified business income	$130,000 - $9,185	$120,815
Taxable income before QBI	$120,815 - $16,100 standard deduction	$104,715
20% of QBI	$120,815 x 20%	$24,163
20% of taxable income	$104,715 x 20%	$20,943
QBI deduction (the lesser)		$20,943

Sam's deduction is capped by taxable income, not by QBI. At a 22% marginal rate, it saves roughly $4,600 of federal income tax. Self-employment tax is unchanged; see our guide to self-employment tax.

Worked example 2: an SSTB owner in the phase-in range

Priya and Dev are married filing jointly. Priya runs a consulting practice (an SSTB) with $300,000 of QBI and no employees. Their 2026 taxable income before the deduction is $478,500, which is $75,000 over the $403,500 threshold, or halfway through the $150,000 phase-in range.

1. Applicable percentage: 100% minus ($75,000 / $150,000) = 50%. Only 50% of the SSTB's QBI counts: $150,000.
2. Tentative deduction: 20% x $150,000 = $30,000.
3. Wage limit: no W-2 wages and little property, so the limit is $0.
4. Phase-in reduction: the $30,000 excess over the wage limit is reduced by 50% ($75,000 / $150,000), leaving $15,000.

The couple's deduction is $15,000, compared with $60,000 if their income had been below the threshold. Under the old $100,000 phase-in range, they would have been fully phased out at this income level and received nothing. Paying wages, including reasonable salary through an S corporation, can change the result; our comparison of S corp vs LLC and LLC vs sole proprietorship explains the structures.

Worked example 3: a small side business and the $400 minimum

Lee has a full-time W-2 job and runs a weekend furniture repair business, which Lee works in personally and materially participates in. In 2026 the business makes $1,600 of qualified business income. Twenty percent of that is $320, but because Lee has at least $1,000 of QBI from an active business, the new minimum rule lifts the deduction to $400. Had the business made only $900, the minimum would not apply and the deduction would be 20% of $900, or $180. The minimum does not help passive investors, and both the $400 and $1,000 figures are scheduled to rise with inflation after 2026, so check the current amounts each year.

Special situations: losses, rentals and more than one business

A few situations come up often for small business owners:

• Business losses. If your combined QBI is negative for the year, you get no deduction, and the loss carries forward to reduce QBI in the following year. This can surprise owners who have a strong year straight after a weak one.
• Several businesses. QBI is worked out for each business and then combined. A loss in one business reduces the income from the others. Above the threshold, owners can sometimes elect to aggregate related businesses so their wages and property are tested together.
• Rental real estate. Rentals can count as a trade or business if the activity is regular and continuous. The IRS offers a safe harbor that generally requires at least 250 hours of rental services a year and separate books and records for each enterprise.
• Partnerships and S corporations. Your share of QBI, W-2 wages and property basis is reported to you on Schedule K-1, usually with a supplemental statement. Keep it with your return.

Each of these rules has details that are easy to get wrong, so these are areas where paying for professional review is often worth it.

How to claim the QBI deduction

1. Work out QBI for each business, after the self-employment tax, health insurance and retirement adjustments.
2. Check the threshold using taxable income before the QBI deduction.
3. Use Form 8995 if you are at or below the threshold, or Form 8995-A if you are above it.
4. Carry forward losses. A net QBI loss in one year reduces QBI in the next year.
5. Adjust estimated payments. Our guide to quarterly estimated taxes shows how.

Tips to protect the deduction

• Keep business income documented. QBI starts with your sales, so number and date every invoice. A consulting invoice template keeps service billing consistent.
• Watch the threshold if you are near it. Retirement contributions and timing of income and expenses can keep taxable income under the line.
• Keep tips separate. If you are self-employed in a tipped occupation, record tips apart from fees so you and your preparer can apply both the QBI rules and the separate tips deduction correctly; see our guide to no tax on tips for the self-employed.
• Review your entity every few years as income grows.
• Remember the knock-on effects. Larger retirement contributions or equipment write-offs reduce QBI as well as taxable income, so the net saving is slightly smaller than the headline deduction suggests.

Conclusion

The QBI deduction is now a permanent part of the tax code, and for most freelancers and small business owners under $201,750 (single) or $403,500 (joint) of taxable income, it is a straightforward 20% deduction. Above those levels, the wage limit and SSTB rules need careful planning. Either way, the deduction starts with accurate records of your business income, so create clear, numbered invoices for free with our US invoice generator, and confirm your figures with a qualified tax adviser before you file.