QBI deduction (Qualified Business Income deduction, IRC § 199A)
Also known as: 199A deduction, Pass-through deduction
A federal deduction of up to 20% of qualified business income from pass-through entities (sole proprietorships, partnerships, S corporations, qualifying trusts) available regardless of whether the filer takes the standard or itemized deduction. Phase-outs apply at higher income levels.
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The Qualified Business Income deduction, introduced by the Tax Cuts and Jobs Act of 2017 and codified at IRC § 199A, is one of the largest federal tax cuts available to self-employed and small-business filers. The headline rule: pass-through entity owners can deduct up to 20% of their qualified business income on Form 1040 line 13. For a sole proprietor with $80,000 of Schedule C net profit, the QBI deduction can shelter up to $16,000 of that income from federal income tax — at a 22% marginal rate, that is $3,520 of immediate federal tax savings, stacking on top of any other deduction the filer takes.
The QBI deduction sits below the standard-or-itemized choice on Form 1040 — it is neither an above-the-line adjustment (which reduces AGI) nor an itemized deduction (which competes with standard). It applies to taxable income after either standard or itemized has been subtracted. This means a self-employed filer can take the standard deduction AND the half-SE-tax adjustment AND the QBI deduction in the same return, with all three stacking. The combined effect for a moderate-income freelancer can be substantial — often the difference between a 22% effective rate on Schedule C income and a 12-15% effective rate after stacking adjustments.
Phase-outs and SSTB rules complicate the deduction at higher incomes. Below the lower threshold — $201,750 of taxable income for single and other filers and $403,500 for married couples filing jointly in 2026, per IRS Rev. Proc. 2025-32 — the full 20% is available regardless of business type. Above the upper threshold, the deduction phases out entirely for 'specified service trades or businesses' (SSTBs — health, law, accounting, performing arts, consulting, financial services, brokerage services, athletics; engineering and architecture are expressly excluded) and is constrained for other businesses by a W-2-wages-paid and qualified-property test. The One Big Beautiful Bill Act widened the phase-in band above the threshold to $75,000 for single filers and $150,000 for joint filers, so for 2026 the band runs $201,750–$276,750 single and $403,500–$553,500 joint. Filers with income near the thresholds should run the calculation carefully — a $5,000 income increase can produce a much larger QBI deduction loss in the phase-out range than the income gain itself.
Form 8995 (the simplified path for filers below the threshold) and Form 8995-A (the longer path for those in or above phase-out) compute the deduction. Tax software handles the mechanics automatically, but understanding the threshold structure is worth knowing for end-of-year income management decisions — particularly for SSTB filers where pushing income just below the lower threshold via a SEP-IRA contribution or solo 401(k) deferral can preserve the full 20% deduction. The QBI deduction was originally scheduled to expire at the end of 2025 along with other TCJA individual provisions, but the One Big Beautiful Bill Act (enacted July 4, 2025) made it permanent — and added a new minimum deduction of $400 for any taxpayer with at least $1,000 of qualified business income from an active trade or business they materially participate in, beginning in tax year 2026.
- Section 199A QBI deduction after OBBBA — the 20% math How the Section 199A QBI deduction works after OBBBA: the 20% math, the new $400 minimum, the 2026 thresholds, the wage limit, and the SSTB trap.
- S-corp election for the self-employed — when the SE tax math works How an S-corp election splits net business income between W-2 salary and distribution, the reasonable-salary standard, and the savings threshold.
- Standard deduction vs itemizing — when the math tilts each way Which deduction path produces the lower federal tax bill in 2026: the mechanics, the SALT cap, the itemizing thresholds, and worked examples for both.
- Schedule SE (Self-Employment Tax) The IRS form that computes self-employment tax — the self-employed equivalent of FICA — at a combined 15.3% on net earnings from self-employment, half of which is deductible above the line.
- AGI (Adjusted Gross Income) AGI is your total gross income for the tax year minus a specific set of statutory adjustments listed on Schedule 1 of Form 1040. It is the figure on which most tax calculations and eligibility tests downstream actually operate — not your gross income, not your taxable income.
- Standard deduction The flat dollar amount the IRS lets every filer subtract from AGI to arrive at taxable income, regardless of actual expenses. Indexed annually for inflation and varies by filing status. The default choice for ~90% of US households post-2017.
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