In short: if you own a pass-through business (sole proprietorship, LLC, partnership, or S-corp), you may be able to deduct up to 20% of your qualified business income before calculating your federal income tax. For a business owner with $100,000 in QBI, that's potentially a $20,000 deduction.
The QBI deduction was originally set to expire after 2025. Under the One Big Beautiful Bill Act (OBBBA), signed in July 2025, it was made permanent, with expanded phase-in ranges and a new $400 minimum deduction starting in 2026.
This guide walks through how it works, who qualifies, and what changed.
This is educational content, not tax advice — talk to a CPA for your specific situation.
What is QBI?
QBI (Qualified Business Income) is the net income from a domestic trade or business, calculated on a pass-through basis. Essentially: your business's net profit after ordinary expenses, but before the QBI deduction itself.
QBI does NOT include:
- Wages from W-2 employment
- C-corporation income (C-corps don't qualify)
- Investment income (interest, dividends, capital gains)
- Reasonable compensation paid to S-corp owners as wages
For sole proprietors, QBI is essentially your Schedule C net income. For LLCs taxed as partnerships, it's your share of the partnership's net income. For S-corp owners, it's the K-1 ordinary business income (NOT including your W-2 salary from the S-corp).
Who qualifies?
To qualify for QBI deduction, you need to be a pass-through business owner. That includes:
- Sole proprietors (including single-member LLCs taxed as sole props)
- Partnerships (and multi-member LLCs taxed as partnerships)
- S-corporations
- Some trusts and estates
C-corporations don't qualify. C-corp owners pay corporate tax on profits, then personal tax on dividends — they don't get the pass-through benefit, but they also don't pay self-employment tax on retained earnings.
How much can you deduct?
The deduction is the lesser of:
- 20% of your qualified business income, OR
- 20% of your taxable income (excluding capital gains)
The 20% of taxable income limit is important — high-income business owners with lots of investment income may not get the full 20% of QBI because their taxable income limits them.
Income thresholds (where it gets complicated)
The QBI deduction has income thresholds where additional limitations kick in. For 2026:
- Below the threshold: $201,750 single / $403,500 married filing jointly. Full 20% deduction. No limitations.
- Within the phase-in range: $201,750–$276,750 single / $403,500–$553,500 MFJ. Partial limitations.
- Above the phase-in: Full limitations apply. W-2 wage limits and SSTB rules kick in.
Below the threshold, the calculation is simple: 20% of QBI. Above the threshold, the deduction is limited by:
- W-2 wage limit: Deduction can't exceed the greater of 50% of W-2 wages paid by the business, OR 25% of W-2 wages plus 2.5% of qualified property basis.
- SSTB (Specified Service Trade or Business) limit: Certain service businesses (health, law, consulting, financial services, athletics, etc.) lose the deduction entirely above the phase-in range.
What's an SSTB?
A Specified Service Trade or Business is one where the business's principal asset is the reputation or skill of one or more employees. Examples:
- Doctors, dentists, veterinarians
- Lawyers
- Accountants and CPAs
- Consultants
- Financial advisors and investment managers
- Athletes and performing artists
- Brokers
Service businesses NOT classified as SSTBs:
- Architects and engineers (specifically excluded from SSTB)
- Real estate agents and brokers
- Most service trades (HVAC, plumbing, contracting, etc.)
The SSTB distinction only matters if your income is above the phase-in threshold. Below the threshold, even SSTB owners get the full 20% deduction.
What changed under OBBBA
The 2025 One Big Beautiful Bill Act made three significant changes:
- Made the QBI deduction permanent. Previously set to expire after 2025 — now permanent law. No more sunset uncertainty.
- Expanded the phase-in range. The window where limitations gradually phase in was widened from $50,000 to $75,000 for single filers and from $100,000 to $150,000 for joint filers. This means more high-income business owners can still claim partial deductions.
- Added a $400 minimum deduction. Starting in 2026, if you have at least $1,000 in QBI from active businesses where you materially participate, you're guaranteed at least a $400 deduction. This protects small business owners whose calculated deduction would otherwise be very small.
Practical examples
Example 1: Sole proprietor, low income
A freelance designer (sole prop) with $60,000 in QBI and $50,000 in taxable income:
- Below the threshold — full 20% applies
- 20% of $60,000 = $12,000
- 20% of $50,000 = $10,000
- Deduction = lesser = $10,000
The taxable income limit kicks in. Still a great deduction.
Example 2: Construction business, moderate income
An S-corp construction business with $150,000 in K-1 ordinary income (after a $70,000 reasonable salary to the owner). The owner's total taxable income is $190,000 (filing single):
- Below the $201,750 threshold for 2026
- 20% of $150,000 = $30,000 deduction
The salary itself (W-2 wages) doesn't qualify for QBI. The $150,000 in K-1 income does.
Example 3: Consultant (SSTB), high income
A consultant (SSTB) with $400,000 in QBI and $450,000 in taxable income (filing single):
- Above the $276,750 phase-in upper limit for single filers
- As an SSTB above the upper threshold, deduction is fully phased out
- QBI deduction: $0
This is why high-income SSTBs often look at S-corp structuring, retirement plan contributions, and other strategies to bring taxable income below the threshold.
Example 4: Small QBI under the minimum deduction rule (2026+)
A side-hustle photographer with $2,000 in QBI:
- Below the threshold
- 20% of $2,000 = $400 calculated deduction
- Or the new $400 minimum deduction under OBBBA
- Deduction = $400
The minimum deduction kicks in if the regular calculation would be lower.
How it's claimed
The QBI deduction is calculated on:
- Form 8995 (simplified) — for taxpayers below the income thresholds
- Form 8995-A (full version) — for taxpayers above the thresholds, multiple businesses, or SSTBs in the phase-in range
The deduction reduces your taxable income but doesn't change your AGI (adjusted gross income). It's claimed on your personal return, even though it's for business income.
What QBI doesn't change
A few important points:
- Doesn't reduce self-employment tax. QBI deduction reduces income tax only. Self-employment tax (15.3%) is calculated on net self-employment earnings before the QBI deduction.
- Doesn't affect state tax. Most states have their own rules. Florida has no state income tax, so this isn't an issue for Florida residents.
- Doesn't change your business income. The deduction is calculated on your personal return, separate from the business's books.
What it means for your bookkeeping
QBI calculation depends on accurate net business income — which means clean books matter.
- Track all legitimate business expenses. Missing deductions reduce QBI on paper but won't increase it.
- Track W-2 wages paid by the business. This matters above the threshold for the W-2 wage limit.
- Track qualified property basis (especially relevant for real estate and capital-heavy businesses).
- Distinguish reasonable compensation (S-corp owner W-2 wages) from K-1 distributions clearly.
The QBI deduction itself isn't a bookkeeping function — your CPA handles it on the return. But the bookkeeping has to be accurate enough for the CPA to calculate it correctly.
Common mistakes
- Forgetting to claim QBI because owners don't know it exists or assume their CPA caught it
- Claiming QBI on W-2 wages (wages from your own S-corp don't qualify; the K-1 income does)
- Including investment income in QBI calculations (doesn't qualify)
- Missing the SSTB classification when income is approaching the phase-in threshold
- Not coordinating with retirement plan contributions that could bring taxable income below the threshold and preserve the full deduction
- Bookkeeping that doesn't cleanly separate wages from K-1 income for S-corps
Frequently asked questions
Yes, if your business has net income. Sole proprietorships are pass-through entities — your Schedule C net income is QBI. Below the income thresholds, you get the full 20% deduction.
No. The W-2 wages you pay yourself as an S-corp owner are NOT qualified business income. The K-1 ordinary income from the S-corp IS QBI. This is one of the trade-offs of S-corp election — too high a salary reduces your QBI deduction.
Probably not, unless you're in one of the specific service industries listed by the IRS (health, law, consulting, financial services, performing arts, athletics, brokerage). Most trades, retail businesses, real estate, and product-based businesses are NOT SSTBs. Architects and engineers are specifically excluded from SSTB classification.
Under OBBBA, QBI is now permanent — no sunset. The phase-in ranges were expanded (more taxpayers benefit), and a $400 minimum deduction was added for small QBI amounts. The 20% deduction rate stayed the same.
Where to start
If you're a pass-through business owner and you're not sure whether your QBI deduction is being claimed correctly — or maximized — that's worth a conversation with your CPA. For most small business owners, the QBI deduction is one of the biggest single tax savings available, and missing it costs real money.
What we can do as bookkeepers: keep your books accurate enough for your CPA to calculate QBI correctly. SoFlo360 helps small business owners with bookkeeping that supports clean tax filing — including the QBI deduction. Spanish-friendly support is available for owners who'd rather handle financial conversations in Spanish.
Book a free consultation or learn more about our bookkeeping services.
This post is educational content, not tax advice. For your specific situation, consult a qualified CPA.