The QBI deduction, explained

What the QBI deduction is

If you own a sole proprietorship, a partnership share or an S corporation, you can deduct up to 20% of your qualified business income — the business's net profit that reaches your return. It's a deduction from taxable income, taken whether or not you itemize. It doesn't lower your adjusted gross income, and it doesn't lower self-employment tax. Written into law in 2017 and due to expire after 2025, it was made permanent in 2025.

What counts as qualified business income

• Counts: the net income of a sole proprietorship, partnership or S corporation from a US business.
• Doesn't count: an S corporation owner's salary, a partner's guaranteed payments, wages you earn as someone else's employee, and investment income like interest, dividends and capital gains.
• Comes off it: deductions tied to the business on your own return — half of self-employment tax, the self-employed health insurance deduction, and retirement contributions for yourself.
• A loss doesn't create a deduction; it carries forward and reduces next year's QBI.

Below the threshold: 20%

If your taxable income before the deduction is at or below $201,750 — $403,500 on a joint return — in2026, the deduction is simply 20% of QBI. The type of business and the wages it pays don't matter. The one limit: it can't be more than 20% of your taxable income, less any net capital gain.

Above the threshold: two more limits

• The wage and property limit. The deduction can't exceed the greater of 50% of the W-2 wages the business pays, or 25% of those wages plus 2.5% of the original cost of its property. It phases in across the range above. A one-person business with no employees and little property can lose most of the deduction here — though in an S corporation, the owner's own salary counts as W-2 wages.
• Specified service businesses. Health, law, accounting, actuarial science, performing arts, consulting, athletics, financial and brokerage services, investing and trading, and any business whose main asset is the skill or reputation of its owners or employees. Across the range, their deduction shrinks; above it, it's gone. Engineering and architecture aren't on the list.

The new $400 minimum

From 2026, anyone with at least $1,000 of qualified business income from businesses they actively work in gets at least a $400 deduction, even if the limits would give less.

S corporation owners: the salary trade-off

Your salary isn't QBI — only the profit after it is. So a higher salary means a smaller QBI deduction, which is why the S corp calculator counts the deduction your salary gives up. Above the threshold it can cut the other way: the salary is W-2 wages, which can raise the wage limit. The salary still has to be reasonable for the work, whatever it does to the deduction.

Mistakes to avoid

• Figuring 20% of profit without first taking off half of self-employment tax, health insurance and retirement contributions.
• Counting an S corporation salary or a partner's guaranteed payments as QBI.
• Missing that a consulting or professional practice is a specified service business once income is over the threshold.
• Forgetting a prior year's business loss, which reduces this year's QBI.

The deduction is claimed on Form 8995 at or below the threshold, and Form 8995-A above it. Every strategy that lowers business profit also shrinks this deduction a little — that's why the calculators on this site ask whether you take it. How it applies to your business is a question for your CPA or tax attorney.