IRC §199A (made permanent by OBBBA, July 2025)
Qualified Business Income (QBI) Deduction
The QBI deduction allows eligible self-employed individuals and small business owners to deduct up to 20% of their qualified business income. This is a significant tax break that phases out at higher income levels.
Who this may apply to
- Self-employed or pass-through entity owner
- Not a C-Corporation
- Taxable income below the applicable 2026 Section 199A threshold, or sufficient wages and qualified property to support the deduction above it
- Business is not a "specified service trade or business" (or income is under threshold)
Strategy connections
Works well with
- S-Corporation Election: Shareholder wages are excluded from QBI and can affect wage limitations.
- Solo 401(k) / SEP-IRA Optimization: Business deductions and retirement contributions can affect taxable income and QBI calculations.
Watch out
- C-Corporation Conversion / Management Corporation: Income earned by a C corporation is not qualified business income.
What could block this
- No qualified trade or business income
- C corporation treatment
- Taxable-income, SSTB, wage, or qualified-property limitations eliminate the deduction
Important considerations
- If you’re a specified service trade or business (SSTB: law, medicine, consulting, financial services, athletics, etc.) and your income exceeds the threshold, the deduction phases out entirely
- Setting your S-Corp salary too low maximizes QBI but triggers IRS reasonable compensation scrutiny — balance both goals
- The §199A deduction is permanent as of 2026 (confirmed by OBBBA) — plan around it as a permanent feature of the tax code
- Several states do not conform to the federal QBI deduction and provide no state-level equivalent: California, New York, New Jersey, Pennsylvania, Massachusetts, Connecticut, Illinois, Ohio, and DC. Residents of these states receive the full federal deduction but no state benefit — our state savings estimates for these states are already set to zero for QBI.
Professional support
Tax Preparer or CPA
Will calculate your QBI deduction, navigate the complex phase-out rules, and optimize your return to maximize the deduction.
Timing
The QBI deduction is claimed on your annual tax return — no advance action required. However, structural decisions (S-Corp salary level, retirement contributions) that affect QBI should be made before year-end.
Official sources
Reviewed 2026-07-24