Section 199A QBI Deduction
A federal deduction of up to 20% of Qualified Business Income for owners of pass-through entities and sole proprietorships.
Detailed Explanation
The QBI deduction under IRC Section 199A allows owners of pass-through entities (sole proprietorships, partnerships, S-Corps, certain trusts and estates, and rental real estate that rises to a trade or business under safe harbors) to deduct up to 20% of qualified business income from federal taxable income. The OBBBA made this deduction permanent. The simple version applies for taxpayers below the income threshold ($241,950 single / $483,900 MFJ in 2026): deduction equals 20% of QBI, capped at 20% of (taxable income minus net capital gains). Above the threshold, two additional rules kick in. Specified Service Trades or Businesses (SSTBs, including law, health, accounting, consulting, financial services, athletics, performing arts, brokerage, investing) phase out the deduction entirely once income exceeds the upper limit ($291,950 single / $583,900 MFJ in 2026). Non-SSTB businesses face the W-2 wage limit: deduction is capped at the greater of (a) 50% of W-2 wages paid by the business, or (b) 25% of W-2 wages plus 2.5% of unadjusted basis immediately after acquisition (UBIA) of qualified property. This makes the W-2 wage decision a multivariable optimization for S-Corp owners at higher income levels: low wages save payroll tax but may waste QBI deduction. QBI is calculated on Form 8995 (simplified, below threshold) or Form 8995-A (above threshold). REIT dividends and PTP income receive a separate 20% deduction without W-2 wage or UBIA limitations.
Key Points
- 2026 income threshold: $241,950 single / $483,900 MFJ. Below threshold = 20% of QBI, no limitations.
- Above threshold: SSTBs phase out entirely. Non-SSTBs limited by W-2 wages or W-2 + UBIA test.
- OBBBA made the deduction permanent (originally was set to sunset after 2025).
- W-2 wage limit: greater of 50% of W-2 wages OR 25% of W-2 wages + 2.5% UBIA.
- Capped at 20% of taxable income minus net capital gains (overall cap).
- Calculated on Form 8995 (simplified) or Form 8995-A (above threshold).
Practical Example
A consultant operates as an S-Corp with $300K of net business income. They take a $100K W-2 salary, leaving $200K of QBI. The consultant is single with $280K taxable income (above the threshold). Consulting is an SSTB, so the QBI deduction phases out: at $280K vs the $241,950 threshold, the partial phaseout reduces the deduction substantially. Compare to a non-SSTB business at the same income with $100K of W-2 wages: the W-2 limit is greater of $50K (50% of $100K) or $25K (25%) + 2.5% UBIA. With $50K W-2 cap, the QBI deduction is limited to $50K rather than the unrestricted $40K (20% of $200K), meaning no W-2 limit constraint here.
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Learn about Tax Planning & StrategyRelated Terms
Pass-Through Entity
A business entity that does not pay federal income tax at the entity level; instead, profits and losses pass through to owners who report them on their individual returns.
S Corporation
A pass-through tax election under Subchapter S of the Internal Revenue Code that avoids corporate double taxation while allowing shareholder-employees to reduce self-employment tax.
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