The Section 199A deduction lets owners of pass-through businesses — S-corps, partnerships, sole proprietorships, and LLCs — deduct up to 20% of qualified business income. For a business generating $300,000 in QBI, that's a $60,000 deduction without spending a dollar. The One Big Beautiful Bill Act made it permanent and expanded the 2026 thresholds.
What Changed Under the OBBBA
The QBI deduction was originally set to expire after 2025. The OBBBA, signed July 4, 2025, eliminated the sunset and made Section 199A permanent. Two additional changes take effect in 2026:
- Wider phase-out window — expanded from $50,000 to $75,000 for single filers and from $100,000 to $150,000 for MFJ, giving high earners a more gradual reduction in the deduction
- New $400 minimum deduction — taxpayers with at least $1,000 of QBI from an active business in which they materially participate now receive at least $400, even if the normal calculation produces less
The 20% deduction rate is unchanged.
2026 Income Thresholds
Per IRS Rev. Proc. 2025-32, the W-2 wage limitation and SSTB phase-out thresholds for 2026 are:
- Single filers: Phase-out begins at $201,750, ends at $276,750
- Married Filing Jointly: Phase-out begins at $403,500, ends at $553,500
These are taxable income figures — after deductions, not gross income.
Below the threshold: Full 20% deduction with no W-2 wage limitation. Most pass-through owners at this income level take the deduction without restriction.
In the phase-out range: The deduction is partially limited based on taxable income relative to the range. W-2 wages paid by the business increase the allowable deduction during phase-in.
Above the threshold — SSTBs: Zero deduction. Specified service trades or businesses (law, accounting, consulting, financial services, health) lose the deduction entirely above the upper limit.
Above the threshold — non-SSTBs: Deduction is limited to the greater of (a) 50% of W-2 wages or (b) 25% of W-2 wages plus 2.5% of the unadjusted basis of qualified depreciable property.
Does Your Business Qualify?
QBI is the net income from a U.S. trade or business that's reported on Schedule K-1, Schedule C, or Schedule E. It excludes:
- W-2 wages you earn as an employee (separate from your business)
- Capital gains and losses
- Interest and dividend income not tied to the trade or business
- Reasonable compensation paid by an S-corp to its shareholder-employee
Most active business income qualifies. The restriction is on who gets the deduction (income thresholds) and how much (W-2 limitations), not on what type of income it is — except for SSTBs above the ceiling.
Planning Strategies
S-Corp Salary Optimization
Above the W-2 wage limitation threshold, your QBI deduction is capped at 50% of W-2 wages paid — including your own reasonable salary. Paying yourself an optimized salary increases the W-2 wage base and your allowable deduction. The tradeoff is more FICA taxes on a larger salary. The optimal compensation level depends on your marginal rate, FICA exposure, and total profit — model both sides before setting your salary for the year.
Retirement Contributions to Manage Taxable Income
Pre-tax retirement contributions reduce taxable income dollar-for-dollar, which can keep you below — or bring you back into — the phase-out range. A SEP-IRA allows contributions up to 25% of net self-employment income (max ~$70,000 in 2026). A Solo 401(k) adds elective deferrals on top of that. For SSTB owners close to $276,750/$553,500, retirement contributions are often the highest-leverage move to preserve any QBI deduction.
Business Aggregation Election
Taxpayers with multiple qualifying businesses can elect to aggregate them for QBI purposes. Combined, the W-2 wages and qualified property from all entities are pooled — often producing a higher allowable deduction than treating each business separately. This matters most when one entity has high QBI but low payroll, and another carries significant W-2 wages. Aggregation must be reported consistently each year and requires careful documentation at filing.
Bottom Line
With Section 199A now permanent, the QBI deduction is a long-term planning variable — not just an annual line item. The expanded 2026 thresholds give most pass-through owners more room to work with, but SSTB owners and those above the ceiling still need a proactive strategy. Compensation structure, retirement contributions, and aggregation all interact, and the right combination depends on your business type and income level.
Contact TS CPA to model the optimal compensation and deduction strategy for your business.