Written by Samuel, Certified Public Accountant
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If you run a sole proprietorship, partnership, S-corporation, or other pass-through business, the Qualified Business Income (QBI) deduction can shelter up to 20% of your business profit from federal income tax. The One Big Beautiful Bill Act made this deduction permanent instead of letting it expire after 2025, and it also changed some of the underlying numbers for 2026.
What QBI Actually Covers
Qualified Business Income is generally the net profit from a pass-through business you own: a sole proprietorship reported on Schedule C, a partnership, an S-corporation, or a similar structure where the business’s income is taxed on your personal return instead of at the entity level. Wages you pay yourself as an S-corp employee do not count as QBI. Only the pass-through profit does.
The Basic Deduction: 20% of Profit
For most owners below the phase-out thresholds, the deduction is simply 20% of your qualified business income, subtracted from taxable income. A sole proprietor with $80,000 of net Schedule C profit and no other limits gets a $16,000 deduction, with no requirement to spend anything to claim it.
The 2026 Phase-Out Thresholds
Above certain income levels, the deduction starts getting limited, especially for “specified service trades or businesses” (SSTBs) like law, accounting, consulting, and health practices. For 2026:
- The phase-in range for wage and property limits starts at $201,750 of taxable income for single filers and $403,500 for married filing jointly.
- SSTB owners lose the deduction entirely once taxable income clears the phase-out range, which runs through $544,600 for the numbers currently in effect.
Below these thresholds, the 20% deduction generally applies in full regardless of business type or how much you pay in wages.
The New Minimum Deduction
Starting in 2026, the law adds a $400 minimum QBI deduction for active business owners who have at least $1,000 of qualified business income from a qualifying trade, even if the standard 20% calculation would otherwise produce less. It is a small provision, but it guarantees very small pass-through businesses get some benefit.
How This Connects to Your Other Tax Planning
The QBI deduction is calculated on top of, not instead of, other business deductions. You still deduct your actual business expenses, including a home office deduction if you qualify, to arrive at net profit first, and QBI applies to what is left. It also does not reduce your self-employment tax bill at all. QBI only affects income tax, since self-employment tax is calculated on net profit before the QBI deduction is applied.
Source: IRS, Section 199A QBI deduction FAQs.
Bottom Line
The QBI deduction is one of the most valuable, and most overlooked, breaks available to pass-through business owners: a real 20% haircut on taxable business profit, now permanent, with a new $400 floor protecting the smallest businesses. Knowing where the 2026 phase-out thresholds sit matters most if you are a service-business owner approaching six figures of taxable income.
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