QBI Deduction Explained: Section 199A Rules for Owners

If you own an S corporation, a partnership, an LLC, or a sole proprietorship, the QBI deduction may be the largest single deduction on your tax return. It can knock 20 percent off the business income you report, which for an owner in the top bracket is worth several percentage points of effective tax rate. It is also one of the most confusing provisions in the code, with thresholds, phase-outs, and a list of disfavored industries that catches many high earners by surprise.

The deduction was created in 2017 and was scheduled to expire after 2025. The 2025 tax legislation made it permanent and widened the phase-out ranges starting with the 2026 tax year, so the rules below are the ones that apply now. That permanence matters: planning around the deduction is no longer a temporary exercise.

This article explains who qualifies, how the calculation works at each income level, what a specified service trade or business is, and the levers owners can pull to protect the deduction. It is educational, not individualized advice. The calculation runs through your personal return, so your CPA is the right person to confirm your numbers.

What the QBI Deduction Is

Section 199A of the Internal Revenue Code allows individuals, trusts, and estates to deduct up to 20 percent of qualified business income from a domestic pass-through business. Qualified business income means the net income, gain, deduction, and loss from the business, with several items excluded: capital gains and losses, dividends, interest income not tied to the business, reasonable compensation paid to an S corporation owner, and guaranteed payments to a partner.

The deduction is taken on the personal return, below the line. It reduces taxable income but not adjusted gross income, so it does not affect AGI-based items like Medicare premium surcharges or the net investment income tax. It is available whether or not you itemize.

The deduction is also capped at 20 percent of taxable income minus net capital gains. An owner whose business income is large relative to total taxable income, perhaps because of big itemized deductions or retirement contributions, can hit this cap. The IRS publishes the full rules and current thresholds on its qualified business income deduction page.

The Three Income Tiers

The calculation depends entirely on your taxable income, not your business income. Taxable income means your total income from all sources after deductions, including a spouse's wages on a joint return. There are three tiers, and the thresholds are indexed annually. For recent years the lower threshold has been roughly $200,000 for single filers and $400,000 for married couples filing jointly. Check the IRS page above for the exact 2026 figures.

Below the Threshold

If taxable income is below the threshold, the deduction is simple. Take 20 percent of QBI from each business, add them up, and compare to 20 percent of taxable income minus capital gains. The smaller number is your deduction. The type of business does not matter. A physician, a lawyer, and a plumber with the same taxable income all get the full deduction. No wage or property tests apply.

Inside the Phase-In Range

Once taxable income crosses the threshold, the limits begin to apply gradually. Under the rules that took effect for 2026, the phase-in range is $75,000 for single filers and $150,000 for joint filers. This is wider than the previous $50,000 and $100,000 ranges, which means the deduction disappears more slowly. Within the range, a specified service business loses a proportional share of the deduction, and other businesses become subject to a proportional share of the wage and property limitation.

Above the Range

Once taxable income exceeds the threshold plus the phase-in range, the rules are fully in force. A specified service business gets no deduction at all. Every other business gets a deduction equal to the lesser of 20 percent of QBI or the greater of two amounts: 50 percent of W-2 wages paid by the business, or 25 percent of W-2 wages plus 2.5 percent of the unadjusted basis of qualified property. That property test is what allows real estate businesses with few employees to keep the deduction.

Specified Service Trade or Business: Who Is On the List

The specified service trade or business, or SSTB, designation is the provision that surprises the most high-income owners. If your business is an SSTB and your taxable income is above the phase-out range, the deduction is zero. The list is set by statute and regulation.

• Health, including physicians, dentists, nurses, therapists, and similar providers
• Law
• Accounting
• Actuarial science
• Performing arts
• Consulting
• Athletics
• Financial services, including advisers and planners
• Brokerage services
• Investing, investment management, trading, and dealing in securities
• Any business where the principal asset is the reputation or skill of one or more employees or owners

What Is Not an SSTB

Architecture and engineering were deliberately excluded. So were most businesses that sell products, manufacture, build, or provide non-professional services. Real estate rental activities that rise to the level of a trade or business qualify and are not SSTBs. Pharmacies, medical device sales, and health clubs are not health services. The regulations narrowed the reputation-or-skill category to endorsement income, licensing of a name or likeness, and appearance fees, so it rarely applies to an ordinary business.

The regulations also include a de minimis rule. A business with gross receipts of $25 million or less is not an SSTB if less than 10 percent of its receipts come from specified service activities. Above $25 million the cutoff is 5 percent. A physician-owned business that mostly sells medical equipment might escape the SSTB label under this rule, but a practice that mostly treats patients will not.

The Anti-Splitting Rules

Early on, some practitioners proposed splitting an SSTB into a service entity and a separate entity that owned the building or provided administrative services, with the non-service entity claiming the deduction. The regulations shut most of this down. If a non-SSTB entity provides 80 percent or more of its property or services to a commonly controlled SSTB, it is treated as an SSTB. Below 80 percent, the portion provided to the SSTB is tainted. Rental income from a building leased to your own practice is generally treated as SSTB income. These structures deserve careful review with a tax adviser before anyone relies on them.

The W-2 Wage and Property Limit

For non-SSTB owners above the threshold, the wage and property test decides how much of the deduction survives. The test compares 20 percent of QBI with the greater of 50 percent of W-2 wages or 25 percent of W-2 wages plus 2.5 percent of the unadjusted basis immediately after acquisition of qualified property.

W-2 wages means wages the business paid and reported to the Social Security Administration, including wages paid to owner-employees of an S corporation. Qualified property means depreciable tangible property used in the business that is still within its depreciable period, or ten years from being placed in service if longer. Buildings count. Land does not.

A quick example: an S corporation with $600,000 of QBI pays $150,000 of W-2 wages and owns $1 million of qualified property. Twenty percent of QBI is $120,000. Fifty percent of wages is $75,000. Twenty-five percent of wages plus 2.5 percent of property is $37,500 plus $25,000, or $62,500. The greater of the two limits is $75,000, which is less than $120,000, so the deduction is $75,000. If the owner raised wages to $240,000, the 50 percent test would produce $120,000 and the full deduction would be available, though the wage increase reduces QBI and carries payroll tax. This is exactly the calculation behind our article on S corp reasonable compensation.

Planning Moves That Protect the QBI Deduction

Because the deduction keys off taxable income rather than business income, owners near the threshold have real options. The goal is either to bring taxable income below the phase-out range or to improve the wage and property numbers. These are the tools we discuss most often in our tax planning work.

Retirement Plan Contributions

A deductible contribution to a 401(k), SEP, or cash balance plan reduces taxable income dollar for dollar. For an SSTB owner sitting $100,000 above the threshold, a $100,000 cash balance contribution can bring back a QBI deduction worth tens of thousands of dollars on top of the deferral itself. For non-SSTB owners, the contribution reduces QBI too, so the math is less dramatic but still favorable in most cases.

Charitable Giving and Timing

Bunching several years of charitable gifts into a donor-advised fund in a high-income year lowers taxable income and can restore the deduction. Accelerating or deferring equipment purchases, prepaying deductible expenses, and timing bonuses to employees all shift taxable income across years. For a married owner, a spouse's retirement contributions and HSA contributions count too, because the test is applied to joint taxable income.

Entity and Compensation Structure

For S corporation owners above the threshold in a non-SSTB, W-2 wages are a lever. Paying more salary reduces QBI but increases the 50 percent wage limit, and there is a salary level that maximizes the combined deduction. For partnerships, guaranteed payments are excluded from QBI but do not count as W-2 wages, so some partnerships restructure guaranteed payments as priority allocations of profit. For a few very high-income SSTB owners, a C corporation can be worth modeling, since the corporate rate applies regardless of industry. That is a large decision with double-taxation consequences, and it deserves its own analysis.

Aggregation, Losses, and Other Details

Owners with more than one business can elect to aggregate them for the wage and property test if they share common ownership and are operationally connected. Aggregation lets a business with high wages support a business with high income and low wages. Once made, the election continues in future years and must be disclosed on the return.

A business with a QBI loss reduces the QBI of your other businesses. If total QBI is negative, the loss carries forward and reduces QBI in the next year. It does not produce a negative deduction. Real estate rental activities count as a trade or business if they meet the general standard, and there is a safe harbor for rental enterprises that log 250 or more hours of rental services per year.

Finally, the 2025 legislation added a small floor: an active owner with at least $1,000 of QBI is entitled to a minimum deduction of $400, indexed for inflation. That matters little for high earners but simplifies things for part-time businesses. The full statutory text is available through the Office of the Law Revision Counsel, and the IRS FAQ answers most practical questions.

The QBI deduction rewards owners who understand the thresholds and plan around them. For an owner below the threshold it is nearly automatic. For an owner above it, especially in a specified service business, the deduction often comes down to decisions made before December 31: how much to contribute to a retirement plan, how much salary to pay, and when to recognize income. Those are financial planning decisions as much as tax decisions, which is why we coordinate them with your CPA as part of our business owner planning. Attend Wealth's advisory services are held to a fiduciary standard, and this article is educational rather than individualized advice.

Tony Colunga · Founder, Attend Wealth

Tony leads Attend Wealth, a fee-based wealth management firm in Atlanta serving professionals, families, physicians, and business owners. Advisory services are held to a fiduciary standard. More about Attend