The QBI Deduction for 2026: 20% of Business Income, the New $400 Minimum and the $201,750 Threshold
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How we wrote this: A summary of the IRS's "Qualified business income deduction" page, the Instructions for Form 8995 (2025) and Revenue Procedure 2025-32 (the 2026 inflation adjustments), all linked below and checked October 29, 2026. The example is our own arithmetic with simplified assumptions. General information, not tax advice.
The qualified business income (QBI) deduction, also called the Section 199A deduction, lets many owners of sole proprietorships, partnerships, S corporations and some trusts and estates deduct up to 20% of their qualified business income. You take it whether you itemize or use the standard deduction. It's claimed on your Form 1040, not on Schedule C, so it doesn't lower self-employment tax.
The two parts, and the cap
The IRS describes two components:
- QBI component: 20% of QBI from a domestic business run as a sole proprietorship or through a partnership, S corporation, trust or estate. At higher incomes it can be limited by the type of business, the W-2 wages it pays and the unadjusted basis of its qualified property.
- REIT/PTP component: 20% of qualified real estate investment trust dividends and qualified publicly traded partnership income.
The total is capped at 20% of your taxable income minus net capital gain. For tax years beginning after 2025, the deduction is the greater of that capped amount or the new minimum deduction (below).
What counts as QBI
QBI is the net income from a qualified trade or business. The IRS says it's reduced by deductions tied to the business, including:
- the deductible part of self-employment tax,
- the self-employed health insurance deduction (see the self-employed health insurance deduction), and
- deductions for contributions to SEP, SIMPLE and other qualified retirement plans (see retirement plans for the self-employed).
QBI doesn't include wages earned as an employee, capital gains, most interest and dividends, reasonable compensation an S corporation pays you, or guaranteed payments from a partnership. Income earned through a C corporation doesn't qualify.
If your businesses have a combined net loss, you get no QBI component that year, and the loss carries forward to reduce QBI in later years.
2026 thresholds and phase-in ranges
Below the threshold, the calculation is simple: the W-2 wage and property limits don't apply, and a specified service business still qualifies. Revenue Procedure 2025-32 sets these 2026 amounts:
| Filing status | 2026 threshold | Top of phase-in range |
|---|---|---|
| Married filing jointly | $403,500 | $553,500 |
| Married filing separately | $201,775 | $276,775 |
| All other returns | $201,750 | $276,750 |
For comparison, the 2025 Form 8995 instructions use $197,300 ($394,600 joint), phasing in up to $247,300 ($494,600 joint). The measure is your taxable income before the QBI deduction.
Specified service businesses (SSTBs)
An SSTB is a business providing services in health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, investing and investment management, trading or dealing in securities and similar assets, or any business whose principal asset is the reputation or skill of its owners or employees (for example, endorsement or appearance fees).
- At or below the threshold, an SSTB is treated as a qualified business.
- Within the phase-in range, only part of it counts, and you use Schedule A of Form 8995-A.
- Above the range, an SSTB's income doesn't count.
New for 2026: the $400 minimum deduction
The 2025 tax law (section 70105 of the act often called the OBBBA) added a minimum deduction of $400 for tax years beginning after December 31, 2025. To get it, you need at least $1,000 of qualified business income from active qualified trades or businesses. The IRS defines "active" as a business in which you materially participate, meeting any one of the material participation tests in the regulations. Both amounts will be adjusted for inflation after 2026.
In practice this matters most for someone with modest business income whose regular 20% calculation would come out below $400.
Form 8995 or 8995-A
The Form 8995 instructions say to use the simpler Form 8995 if your taxable income before the QBI deduction is at or below the threshold and you aren't a patron of a specified agricultural or horticultural cooperative. Otherwise, use Form 8995-A and its schedules.
A simplified 2026 example
Assume a single sole proprietor whose only income is $60,000 of Schedule C net profit, with no retirement contributions, health insurance premiums or capital gains, who takes the 2026 standard deduction of $16,100 (from Revenue Procedure 2025-32).
| Step | Amount |
|---|---|
| Deductible half of self-employment tax ($60,000 × 92.35% × 15.3% ÷ 2) | about $4,239 |
| QBI ($60,000 − $4,239) | $55,761 |
| QBI component (20%) | $11,152 |
| Taxable income before the QBI deduction ($60,000 − $4,239 − $16,100) | $39,661 |
| Taxable income cap (20%) | $7,932 |
| QBI deduction (the smaller) | $7,932 |
The cap, not the 20% of QBI, sets the deduction here, which is common for people whose business is their main income. The free self-employment tax calculator shows the deductible half of SE tax for your own numbers.
Related guides
- Estimated quarterly taxes for the self-employed
- Choosing a business structure
- Section 179 and bonus depreciation for 2026