If you own a business, you’ve probably heard plenty about deductible expenses such as mileage, advertising, equipment, and professional fees.

But there’s another potentially valuable tax deduction that some business owners may overlook: the Qualified Business Income (QBI) deduction.

Also known as the Section 199A deduction, the QBI deduction may allow eligible business owners to deduct up to 20% of qualified business income, subject to various rules and limitations.

For qualifying taxpayers, that can potentially create significant tax savings.

So, who qualifies—and how does it work?

What Is the QBI Deduction?

The Qualified Business Income deduction is a federal income tax deduction available to certain owners of pass-through businesses and other eligible taxpayers.

Unlike a traditional business expense, the QBI deduction generally doesn’t reduce the income reported by the business itself. Instead, eligible taxpayers calculate the deduction on their individual income tax returns.

The deduction can generally be up to 20% of qualified business income, although limitations can reduce the amount available.

The QBI deduction was originally created by the Tax Cuts and Jobs Act and was scheduled to expire after 2025. Recent legislation made the deduction permanent and introduced additional changes beginning with the 2026 tax year.

What Is Qualified Business Income?

Qualified Business Income generally refers to the net amount of qualified income, gains, deductions, and losses connected with an eligible U.S. trade or business.

In simpler terms, think of QBI as certain qualifying business profit after applicable business deductions.

However, your QBI isn’t necessarily identical to the net profit shown on your business’s financial statements or tax return.

Certain tax deductions and adjustments can affect the calculation.

Who May Qualify for the QBI Deduction?

The deduction may be available to owners of several common types of businesses, including:

• Sole proprietorships
• Partnerships
• S corporations
• Certain trusts and estates
• Some qualifying rental real estate activities

Partners and S corporation shareholders generally claim their respective QBI deductions on their individual returns rather than the partnership or S corporation taking the deduction itself.

Eligibility depends on several factors, including the type of business, taxable income, and other applicable limitations.

What Doesn’t Qualify?

Not every type of income qualifies as QBI.

Examples of amounts that generally aren’t considered QBI include:

• Wages earned as an employee
• Capital gains and losses
• Certain investment income
• Certain interest income
• Reasonable compensation received by an S corporation shareholder
• Guaranteed payments received by partners
• Certain dividends and other investment-related income

Income earned through a C corporation also doesn’t qualify for the QBI deduction.

Simply owning a business doesn’t mean that every dollar you receive qualifies.

How Much Is the QBI Deduction?

For many eligible taxpayers, the starting point is generally 20% of qualified business income.

Here’s a simplified example:

Suppose an eligible business owner has $80,000 of qualified business income.

Twenty percent of $80,000 is $16,000.

The business owner might therefore have a potential QBI deduction of up to $16,000.

However, this is only a simplified illustration.

The actual deduction can be affected by taxable income, capital gains, business type, wages paid by the business, qualified property, losses, and other factors.

That’s why you shouldn’t automatically assume your deduction equals exactly 20% of your business profit.

Your Income Level Matters

One of the most important parts of the QBI rules involves the taxpayer’s taxable income.

For 2026, the QBI threshold amounts are:

• $403,500 for married taxpayers filing jointly
• $201,775 for married taxpayers filing separately
• $201,750 for other filing statuses

Once taxable income exceeds the applicable threshold, additional limitations can begin to apply.

For 2026, the phase-in range is generally $150,000 for married taxpayers filing jointly and $75,000 for other filing statuses.

Because these amounts can change over time, taxpayers should verify the limits applicable to the specific tax year they’re filing.

What Happens Above the Income Threshold?

Once taxable income exceeds the applicable threshold, calculating the QBI deduction can become more complicated.

Depending on the situation, the deduction may be affected by factors such as:

• W-2 wages paid by the business
• Qualified property owned by the business
• The taxpayer’s taxable income
• Whether the business is considered a specified service trade or business

Higher-income business owners shouldn’t assume they’re automatically disqualified.

Instead, additional calculations determine how much of the deduction may remain available.

What Is a Specified Service Trade or Business?

Certain businesses are classified as Specified Service Trades or Businesses, commonly abbreviated as SSTBs.

These can include businesses involving certain services in areas such as:

• Health
• Law
• Accounting
• Consulting
• Financial services
• Brokerage services
• Performing arts
• Athletics
• Investing and investment management

Additional categories and definitions apply.

Being an SSTB doesn’t automatically mean you can’t receive a QBI deduction.

However, once taxable income exceeds applicable thresholds, special limitations can begin reducing the amount of qualifying income. At sufficiently high taxable income levels, the QBI deduction associated with an SSTB may be eliminated.

What About Rental Property?

Some rental real estate activities may qualify for the QBI deduction, but owning rental property doesn’t automatically mean the income qualifies.

The IRS has provided a safe harbor under which certain rental real estate enterprises may be treated as a trade or business for QBI purposes when specific requirements are satisfied.

A rental activity that doesn’t meet the safe harbor may still potentially qualify if it otherwise rises to the level of an eligible trade or business under applicable tax rules.

Rental property owners should therefore evaluate their individual circumstances rather than assuming all rental income qualifies—or doesn’t qualify.

A New QBI Rule Beginning in 2026

The QBI deduction received an important update beginning with the 2026 tax year.

Recent legislation made Section 199A permanent and introduced a minimum QBI deduction for certain taxpayers.

Beginning in 2026, taxpayers with at least $1,000 of total QBI from active qualified trades or businesses may potentially qualify for a minimum deduction of $400, subject to applicable requirements.

These amounts are scheduled to be adjusted for inflation for tax years after 2026.

This is one reason it’s important to use current tax rules rather than relying on older information about the QBI deduction.

How Do You Claim the QBI Deduction?

Eligible individual taxpayers generally calculate the deduction using:

Form 8995 — Qualified Business Income Deduction Simplified Computation

or

Form 8995-A — Qualified Business Income Deduction

Which form applies depends on factors including taxable income and the complexity of the taxpayer’s QBI situation.

The resulting deduction is then reported on the individual income tax return.

Do You Have to Itemize to Claim QBI?

No.

The QBI deduction can generally be claimed whether you take the standard deduction or itemize deductions.

That makes it different from deductions that are available only when a taxpayer itemizes.

Eligible business owners shouldn’t assume they miss out on QBI simply because they take the standard deduction.

Good Bookkeeping Matters for QBI

Like many business tax benefits, accurately calculating QBI starts with accurate financial records.

Your bookkeeping should clearly track:

• Business income
• Deductible expenses
• Payroll
• Owner compensation
• Retirement contributions
• Business assets
• Business losses
• Other relevant transactions

Poor bookkeeping can make determining qualified business income much more difficult.

Keeping your books current throughout the year gives your tax professional better information to evaluate whether you qualify and calculate the deduction correctly.

Don’t Assume You Don’t Qualify

The QBI deduction can be confusing because eligibility isn’t based on a single question.

Your business structure, income, business type, wages, property, losses, and other factors can all affect the calculation.

Some business owners may assume they don’t qualify when they actually do.

Others may assume they’re entitled to a full 20% deduction when limitations reduce the amount.

That’s why QBI should be evaluated as part of your overall tax situation.

The Bottom Line

The Qualified Business Income deduction can potentially provide a valuable federal income tax benefit for eligible business owners.

For qualifying taxpayers, the deduction may be worth up to 20% of qualified business income, although income thresholds and other limitations can significantly affect the final amount.

And beginning in 2026, the deduction is permanent, with expanded phase-in ranges and a new minimum deduction for certain eligible taxpayers.

If you own a sole proprietorship, partnership interest, S corporation, or qualifying rental activity, the QBI deduction is worth discussing with your tax professional.

Could your business qualify for the QBI deduction? Contact our team to review your business structure, income, and tax situation and determine which deductions may be available to you.