The QBI Deduction for the Self-Employed: 20% Off, With Conditions

Since 2018, a self-employed person, a partner, an S corporation shareholder, and many landlords have been able to deduct 20% of their business income before computing tax. A plumber with $80,000 of Schedule C profit deducts $16,000 and pays income tax on $64,000. It is the largest tax break most small businesses have, it does nothing for self-employment tax, and it was scheduled to vanish after 2025. The 2025 act made it permanent and loosened it slightly.

Below the income thresholds the deduction is almost automatic. Above them, it depends on what kind of business you run, how much you pay in wages, and what you own, and a doctor, a lawyer and a consultant can lose it entirely while a contractor with the same income keeps it. Below is the whole rule, the 2026 numbers, and the things that quietly shrink the deduction on the way to the form.

The Basic Deduction

The IRS calls it: the qualified business income deduction, Section 199A

The deduction is the lesser of 20% of your qualified business income, or 20% of your taxable income minus net capital gains. The second limit exists so the deduction can’t exceed what the rest of your return has in it: a sole proprietor with $80,000 of profit, a $32,200 standard deduction and no other income has taxable income of about $42,000 before the deduction, so the deduction is 20% of $42,000, not 20% of $80,000. Married couples with a working spouse rarely hit that limit; single filers with nothing but the business often do.

It is taken after adjusted gross income and after the standard or itemized deduction. It does not reduce AGI, so it doesn’t help with the phase-outs on the high-earners page, and it does not reduce self-employment tax, which is computed on the full profit. Form 8995 handles the simple cases; Form 8995-A the ones above the thresholds.

What Counts as QBI

The IRS calls it: qualified items of income, gain, deduction and loss from a qualified trade or business

In: net profit from a Schedule C, your share of ordinary income from a partnership or S corporation, net income from a rental that is a trade or business, and farm income. Business must be conducted in the United States.

Out: wages, including the salary an S corporation pays you; guaranteed payments to a partner; capital gains and losses; interest and dividends (except REIT dividends, below); income from a business you don’t materially participate in is still in, but a hobby is not.

Reduced by the deductions that come from the business even though they appear elsewhere on the return: the deductible half of self-employment tax, self-employed health insurance, and contributions to a SEP, SIMPLE or solo 401(k). A sole proprietor with $100,000 of Schedule C profit, $7,000 of deductible SE tax, $12,000 of health insurance and $15,000 into a SEP has QBI of $66,000, not $100,000. The retirement contribution is still worth making; it just makes the QBI deduction smaller, which is one of the reasons a Roth solo 401(k) can beat a SEP for a high-QBI owner.

A net loss from one business offsets QBI from another, and a net loss for the year carries forward and reduces next year’s QBI before the 20% is computed.

The 2026 Thresholds

Taxable income, before the QBI deduction

	Single, head of household	Married filing jointly
Threshold (full deduction below)	$201,750	$403,500
Phase-in range (widened by the 2025 act)	$75,000	$150,000
Top of the phase-in (limits fully apply above)	$276,750	$553,500

Below the threshold: 20% of QBI, period. No wage test, no property test, no service-business test. Most self-employed people are here.

In the phase-in: the limits below apply proportionally. At the midpoint of the range, a service business keeps half its deduction and a non-service business is halfway between the unlimited deduction and the wage-limited one. The 2025 act widened the range from $50,000/$100,000, which means the deduction fades more gently and more people keep part of it.

Above the phase-in: service businesses get nothing; everyone else is limited by wages and property.

The threshold is taxable income, after the standard or itemized deduction, so a couple with $430,000 of income and $32,200 of standard deduction is at $397,800 and under the line. Retirement contributions, which reduce taxable income, can pull a business owner back under the threshold and are the standard planning move in the phase-in range.

The Specified Service Trades

The IRS calls it: a specified service trade or business, SSTB

Above the thresholds, the deduction disappears for businesses in health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, investing and investment management, trading, and any business where the principal asset is the reputation or skill of its owners or employees. The last category was narrowed by regulation to endorsement income, licensing of a name or likeness, and appearance fees, so a successful plumber is not an SSTB; a physician is.

The lines are drawn by the regulations and they are specific. Health means providing medical services to patients: physicians, dentists, nurses, therapists, pharmacists, veterinarians. It does not include health clubs, medical device sales, or a lab that doesn’t treat patients. Consulting means advice for a fee; it does not include a sales business that gives advice as part of selling something else. Financial services covers advisers, planners and wealth managers; it does not include banks taking deposits and making loans. Architects and engineers are excluded by statute, which is why a civil engineer at $600,000 keeps the deduction and a CPA at $600,000 doesn’t.

Mixed businesses: if the service side is small (under 10% of receipts, or 5% if receipts exceed $25 million), the whole business is non-service. Otherwise the service and non-service lines can be separated into two businesses with separate books.

So the tax law, written by lawyers, excludes lawyers from the deduction, and accountants, and doctors, and consultants. And includes engineers. I have a theory about who was in the room.

The Wage and Property Limit

The IRS calls it: the W-2 wage and UBIA limitation

For non-service businesses above the threshold, the deduction can’t exceed the greater of:

• 50% of the W-2 wages the business paid, or
• 25% of W-2 wages plus 2.5% of the original cost of the depreciable property the business owns (the unadjusted basis immediately after acquisition, “UBIA,” counted for ten years or the depreciation life if longer).

A sole proprietor with no employees and no equipment, earning $350,000, has zero wages and zero property, and above the phase-in the deduction is zero. The same person as an S corporation paying themselves $120,000 of reasonable salary has $120,000 of W-2 wages, a limit of $60,000, and QBI of $230,000 (profit after salary), so a $46,000 deduction. This is the interaction with the S corporation question: at high incomes, the salary that costs payroll tax is the same salary that unlocks the deduction, and the right salary is a calculation, not a guess.

A landlord with a $1,500,000 building (land excluded) has UBIA of $1,500,000 and a property limit of $37,500 before any wages, which is why real estate rarely hits the wall.

Rentals and REITs

The IRS calls it: Revenue Procedure 2019-38, and qualified REIT dividends

A rental qualifies if it rises to the level of a trade or business, which the code doesn’t define and the IRS resolved with a safe harbor: 250 hours a year of rental services (by you, your employees or contractors: repairs, management, advertising, collecting rent, not travel or investor-type review), separate books, and contemporaneous time logs, for the property or for all your residential rentals as a group. Triple-net leases and a home you also use don’t qualify under the safe harbor. A rental that doesn’t meet the safe harbor can still qualify on the facts; a single condo rented to one tenant for years with a management company doing everything usually doesn’t. A rental to your own business (self-rental) qualifies automatically.

REIT dividends (box 5 of the 1099-DIV) and income from publicly traded partnerships get the 20% deduction with no wage, property or service-business test and no threshold. It is the one place the deduction is available to people with no business at all.

The New $400 Minimum

Added by the 2025 act, starting with 2026 returns

If you have at least $1,000 of QBI from a business you materially participate in, your deduction is at least $400, even if 20% of your QBI is less. A side business with $1,200 of profit, which would have produced a $240 deduction, now produces $400. Both figures are indexed after 2026. It is small, it rewards the gig worker and the part-time consultant, and the software should pick it up if the material-participation box is checked.

Two Worked Examples

Colorado

Colorado starts from federal taxable income, which is after the QBI deduction, so the deduction reduces Colorado tax at 4.40% automatically. One exception: for several years Colorado has required taxpayers with federal adjusted gross income above $500,000 (single) or $1,000,000 (joint) to add the QBI deduction back on the Colorado return, so the state’s highest earners pay 4.40% on it. That addback was enacted through 2025 and whether it continues for 2026 is to be confirmed (verify status of the Colorado QBI addback for tax year 2026). For everyone under those incomes, nothing to do.