Qualified Business Income (QBI) Deduction
The Qualified Business Income (QBI) deduction lets owners of pass-through businesses write off up to 20% of their qualified business income before figuring federal tax, and as of 2026 it's a permanent part of the code rather than a provision set to expire.
The QBI deduction (Section 199A) started with the 2017 Tax Cuts and Jobs Act and was scheduled to die at the end of 2025. It didn't. The One Big Beautiful Bill Act, signed July 4, 2025, struck the sunset date and made the 20% deduction permanent. (Congress floated bumping the rate to 23% along the way; that didn't make the final law — it stayed at 20%.) For a pass-through owner in the top bracket, that 20% knocks the effective rate on business income from 37% down to 29.6% — and that math now holds for good, not just through one more filing season.
You qualify if you run a sole proprietorship, own S-Corp stock, or hold an interest in an LLC or partnership. The deduction attaches to domestic business profit only. Your W-2 wages, capital gains, dividends, and interest don't count toward it, and neither does income earned outside the United States.
Where your taxable income lands decides how hard you have to work for the full 20%. For 2026 the taxable-income thresholds are $201,750 single and $403,500 married filing jointly (Rev. Proc. 2025-32). Stay under those and you take the full deduction no matter what kind of business you run. Climb above them and two limits start biting — your deduction gets capped by the W-2 wages your business pays and the cost basis of its qualified property. OBBBA also widened the phase-in band on top of those thresholds: it now runs $75,000 for single filers (full phase-in at $276,750) and $150,000 for joint filers (full phase-in at $553,500), so the limits ramp in more gently than they used to.
Specified service businesses get the rougher treatment. If you practice law, medicine, accounting, consulting, or financial services — fields where the product is essentially your expertise — your deduction shrinks once you pass the threshold and disappears entirely at the top of the phase-in range. A solo consultant filing single with $300,000 of taxable income, for instance, is past $276,750 and gets nothing. A plumber or a manufacturer at the same income keeps the deduction as long as the wage and property tests are met.
One genuinely new wrinkle for 2026: there's now a floor. If you have at least $1,000 of QBI from a business you actively work in, your deduction can't fall below $400, even when the regular formula would spit out less. Both numbers index for inflation after 2026. It's small, but it puts something in the hands of micro-business owners who used to get squeezed out by the wage test. You take all of this on your personal return — you don't need to itemize, and it sits on top of either the standard deduction or your Schedule A.
Practical Example
Take a plumbing-business owner who files jointly with $250,000 of taxable income, which keeps her under the $403,500 threshold where the full 20% applies regardless of her trade. With $250,000 of qualified business income, her QBI deduction is $50,000 (20% of QBI, and not more than 20% of taxable income). With income in that range, her last dollars fall in the 24% bracket, so the $50,000 deduction saves her roughly $12,000 in federal tax. She claims it on her 1040 — no itemizing required, and the deduction is now permanent rather than scheduled to expire.