What is the qualified business income deduction?
The qualified business income (QBI) deduction is a tax deduction that allows eligible self-employed and small-business owners to deduct up to 20% of their qualified business income on their taxes.
This tax deduction, also known as the section 199A deduction, was set to expire at the end of 2025 — but has been made permanent with the passing of the “big, beautiful bill.”
In general, total taxable income in 2025 must be under $197,300 for single filers or $394,600 for joint filers to qualify. In 2026, the income threshold will be adjusted based on the rate of inflation.
If you’re over that limit, complicated IRS rules determine whether your business income qualifies for a full or partial deduction. Here's how the qualified business income deduction generally works.
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Who qualifies for the qualified business income deduction?
The qualified business income deduction is for people who have “pass-through income” — that’s business income that you report on your personal tax return. Entities eligible for the qualified business income deduction include:
- Sole proprietorships.
- Partnerships.
- S-corporations.
- Limited liability companies (LLCs).
Because C-corporations are their own taxable entity, they are not eligible for this deduction. You’re also not eligible for the QBI deduction if you earn income as an employee, rather than a business owner or partner.
What is "qualified business income"?
The qualified business income deduction by definition applies to "qualified business income." Qualified business income is defined as "the net amount of qualified items of income, gain, deduction and loss from any qualified trade or business”. Broadly speaking, that means your business's net profit.
But it also means that not all business income qualifies. QBI excludes:
- Interest income.
- Income earned outside the U.S.
- Certain wage and guaranteed payments made to partners and shareholders.
How to qualify for the QBI deduction
If your total taxable income — that is, not just your business income but other income as well — is at or below $197,300 for single filers or $394,600 for joint filers in 2025 you may qualify for the 20% deduction on your taxable business income. In 2026, the limits will be adjusted for inflation.
But if your income is above these limits, that’s when the headache really kicks in.
Here’s why: Above those income limits, your ability to claim the pass-through deduction depends on the precise nature of your business. And even if your business qualifies, there’s a chance you won’t get to enjoy the full 20% tax break, as the qualified business income deduction is phased out for some businesses.
If you’re over the income limit
Many high earners in these fields won’t qualify for this tax break, because in 2025, it disappears once you hit a total taxable income of $247,300 if you’re single, and $494,600 if you’re married filing jointly.
Tests for pass-through businesses over the income limit:
- If your business is a “specified service trade or business” in 2025 and your income is from $197,300 to $247,300 (single filers) or from $394,600 to $494,600 (joint filers), there are some tests to determine whether you can claim the qualified business income deduction, and, if so, whether it’ll be reduced. In 2026, these figures will be adjusted for inflation, but the phase-in ranges (where the deduction starts to shrink based on income) will increase. For 2025, the phase-in threshold is $50,000 for single filers and $100,000 for joint filers. In 2026, these thresholds will increase to $75,000 and $150,000 for single and joint filers, respectively.
- The same goes if you own a business with pass-through income that’s not a “specified trade or business”: There are tests that determine how much of the deduction you can claim.
- Specifically, the amount of your deduction is based on a calculation tied to the amount of wages you paid to employees (including yourself), as well as the value of the property the business owns. The higher those figures, the better your chances of being able to qualify for the deduction.
- But it gets complicated, and fast. So if your tax situation falls into this area, now might be a good time to consult a tax professional. Or check out the IRS regulations for more details.
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What to keep in mind when claiming the QBI deduction
There are a couple of aspects of the pass-through deduction to keep in mind:
1. There are actually two 20% figures. The qualified business income deduction is worth up to 20% of your taxable business income. But it’s also true that when claiming this pass-through deduction, it can’t add up to more than 20% of your total taxable income.
Here’s how it works: You figure your business income and expenses on Schedule C, as normal. And you figure your adjusted gross income on Form 1040, as usual. Only after that do you start calculating this pass-through deduction.
2. You can claim the qualified business income deduction even if you don’t itemize. That is, if you use the standard deduction, this deduction is still available to you. (Here’s how much the standard deduction is worth this year.)
3. A new minimum QBI deduction will be available in 2026. The “big, beautiful bill” has introduced a minimum $400 deduction that will take effect with the 2026 tax year. To qualify, you must have at least $1,000 of QBI from one or more active businesses that you actively participate in. If you meet these criteria, you can receive a minimum deduction of $400 (which will be adjusted each year for inflation) — even if the normal 20% QBI calculation would result in a lower amount, or even no deduction at all.
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- 1. Internal Revenue Service. Qualified Business Income Deduction. Accessed Jul 28, 2025.
- 2. Internal Revenue Service. Publication 535. Accessed Nov 20, 2023.
