What is QBI deduction?
This question was answered by Taylor, CPAI, Deduction’s AI tax accountant, and Deduction’s licensed CPAs.
Qualified Business Income (QBI) deduction, also called the Section 199A deduction, allows eligible taxpayers to deduct up to 20% of their qualified business income from pass-through entities, plus 20% of qualified REIT dividends and publicly traded partnership (PTP) income.
Who Qualifies?
Owners of:
- Sole proprietorships (Schedule C filers)
- Partnerships
- S corporations
- Certain trusts and estates
Not eligible: Income earned through a C corporation or as a W-2 employee.
What Is QBI?
QBI is the net amount of qualified items of income, gain, deduction, and loss from a qualified trade or business in the United States. It does not include:
- Capital gains/losses
- Dividends
- Interest income (non-business)
- Reasonable compensation from an S corporation
- Guaranteed payments from a partnership
Income Thresholds
Below threshold: Full 20% deduction with no limitations.
Above threshold: Deduction may be limited by W-2 wages paid and/or unadjusted basis of qualified property. Specified Service Trades or Businesses (SSTBs) may be partially or fully excluded.
How to Claim
- Form 8995 - Simplified computation (if below threshold and no SSTBs)
- Form 8995-A - If above threshold or have SSTBs
The deduction is available whether you itemize or take the standard deduction.
New for 2026: The $400 Minimum Deduction
Starting this year, the IRS has introduced a "Safety Net" for small-scale entrepreneurs.
The Rule: If you have at least $1,000 of QBI from a business in which you materially participate, you are guaranteed a minimum deduction of $400.
Why it matters: Previously, a business making $1,500 would only get a $300 deduction (1,500×20%). Now, that same business gets $400, providing a slightly higher benefit for micro-businesses.
2026 Income Thresholds (Updated)
Because of the OBBBA and annual inflation adjustments, the "safe zones" where you get the full 20% deduction without any complex wage or property tests have moved up:
Related Questions
- What are the tax implications of guaranteed payments to partners?
- How does the at-risk rule apply to partnership losses?
- What Is an SSTB for Form 8995?
Sources:
IRS: Qualified Business Income Deduction
The information provided does not, and is not intended to, constitute legal advice.
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