The 20% QBI deduction: who gets it, and why high earners often don’t

The pass-through deduction is now permanent, with wider phase-ins for 2026. Here’s how it works, where physicians and consultants lose it, and how S corp salary fits in.

What the deduction is

Section 199A lets owners of sole proprietorships, partnerships, LLCs, and S corporations deduct up to 20% of their qualified business income (QBI). It also covers 20% of qualified REIT dividends and publicly traded partnership income. Income earned as an employee or through a C corporation doesn’t qualify.

It’s taken on your personal return whether you itemize or take the standard deduction. It lowers taxable income, but not your adjusted gross income and not your self-employment tax. You claim it on Form 8995, or Form 8995-A once your income is above the threshold.

What changed under the One Big Beautiful Bill Act

The deduction was set to expire after 2025. The One Big Beautiful Bill Act, signed July 4, 2025, made it permanent and kept the rate at 20% (a proposed increase to 23% didn’t survive). Starting with 2026 tax years:

Wider phase-in ranges: $75,000 for single filers (up from $50,000) and $150,000 for joint filers (up from $100,000).
2026 thresholds: $201,750 single and $403,500 married filing jointly. Limits are fully phased in at $276,750 and $553,500.
A new minimum deduction of $400 for taxpayers with at least $1,000 of QBI from active businesses in which they materially participate, indexed for inflation after 2026.

Below the threshold: the simple version

If your 2026 taxable income before the deduction is at or below $201,750 (single) or $403,500 (joint), the rules are simple: the deduction is the lesser of 20% of QBI or 20% of taxable income (minus net capital gain). Your type of business doesn’t matter, and neither do wages or equipment.

Example: a single consultant has $170,000 of Schedule C profit. QBI is reduced by business-related deductions such as half of self-employment tax (about $12,010), so QBI is about $157,990 and 20% is $31,598. Taxable income is about $141,890 after the $16,100 standard deduction, and 20% of that is $28,378. The smaller figure wins: a $28,378 deduction.

Note what reduces QBI: the deductible part of self-employment tax, self-employed health insurance, and retirement plan contributions attributable to the business. People often forget these and overstate the deduction.

Specified service businesses: why many professionals lose it

Above the threshold, owners of a specified service trade or business (SSTB) start losing the deduction, and above the phase-in range it’s gone entirely. SSTBs include businesses in:

Health (physicians, dentists, therapists, and similar)
Law and accounting
Consulting, financial services, and investment management
Actuarial science, performing arts, athletics, and brokerage
Any business whose principal asset is the reputation or skill of its owners or employees

Worked example: a physician in the phase-in range

A married physician has $300,000 of QBI from her practice and joint taxable income of $478,500 before the deduction in 2026. That’s $75,000 over the $403,500 threshold — halfway through the $150,000 phase-in range.

So only 50% of her QBI (and of her share of the practice’s W-2 wages) counts: $150,000 × 20% = $30,000. Assuming the practice pays enough staff wages that the wage limit doesn’t bite, her deduction is $30,000, down from $60,000 below the threshold. At $553,500 of joint taxable income, it would be zero.

There is a de minimis rule for mixed businesses: if gross receipts are $25 million or less and under 10% come from SSTB activities, the whole business isn’t treated as an SSTB. Engineering and architecture firms are not SSTBs.

Non-service businesses: the W-2 wage and property limit

Owners of non-SSTB businesses keep the deduction at any income, but above the phase-in range it’s capped at the greater of 50% of the W-2 wages the business pays, or 25% of W-2 wages plus 2.5% of the unadjusted basis immediately after acquisition (UBIA) of qualified property, such as equipment and buildings. Within the range, the cap phases in gradually.

Example: a single owner with $400,000 of taxable income has $200,000 of QBI from a manufacturing business that pays $30,000 of W-2 wages and owns $800,000 of equipment. Twenty percent of QBI is $40,000. The wage-only test gives $15,000; the wage-plus-property test gives $7,500 + $20,000 = $27,500. The deduction is $27,500.

A sole proprietor with no employees and little equipment, above the range, can end up with no deduction at all — which is where S corp salary comes in.

How S corp salary fits in

S corp reasonable compensation isn’t QBI, but it does count as W-2 wages for the limit. Below the threshold, every dollar of salary reduces your deduction. Above it, salary can increase the deduction for a non-SSTB business, up to a point.

Example: a single owner of an e-commerce S corp with no other employees has $400,000 of profit before her salary (ignoring the employer payroll tax for simplicity), putting her above the range. At a $100,000 salary, QBI is $300,000; 20% is $60,000, but the wage limit is $50,000, so she gets $50,000. At $120,000, QBI is $280,000; 20% is $56,000 and the wage limit is $60,000, so she gets $56,000. At $140,000, she gets $52,000.

The math peaks around $114,000 of salary, but salary must first be reasonable for the work. Use the QBI effect to choose within a defensible range, never to justify a number outside it. For SSTB owners above the range, salary doesn’t help the deduction at all.

Below the threshold the logic flips: salary only reduces QBI, so the deduction falls as salary rises. That’s one reason an S corp election can save less than expected for owners with moderate income.

Common mistakes

The QBI calculation is mechanical, but the inputs are easy to get wrong. The errors we see most often:

Forgetting to reduce QBI by the deductible part of self-employment tax, self-employed health insurance, and business retirement contributions.
Treating S corp salary or partnership guaranteed payments as QBI.
Ignoring a prior-year QBI loss carryforward, which reduces this year’s QBI.
Missing that a consulting or financial-services side business is an SSTB, or assuming an engineering firm is one.
Using W-2 wages from the wrong entity, or wages from a payroll provider’s filing that doesn’t match the business.
Overlooking the taxable income cap, which often binds for owners with modest other income and large standard deductions.

Planning points and what to gather

Most QBI planning is about taxable income and business structure. Retirement contributions can pull an SSTB owner back toward or below the threshold, though business-related contributions also reduce QBI. Owners with several businesses may be able to aggregate them to share wages and property, if they meet the ownership and operational tests. Rental real estate may qualify, including under the IRS safe harbor for enterprises that meet the record-keeping and 250-hour tests.

To estimate your deduction, gather:

K-1s showing QBI, W-2 wages, and UBIA for each business
Schedule C profit and your deductible self-employment tax, health insurance, and retirement contributions
Prior-year QBI loss carryforwards (they reduce this year’s QBI)
A projection of taxable income, so you know where you sit against the 2026 thresholds
A description of each business’s services, to check SSTB status

Frequently asked questions

Is the QBI deduction still available after 2025?

Yes. The One Big Beautiful Bill Act made it permanent, keeping the 20% rate and widening the phase-in ranges starting in 2026.

I’m a physician earning $700,000. Do I get anything?

Generally not from your practice income, because a health practice is an SSTB and your income is above the $553,500 joint phase-in limit for 2026. You may still get the deduction on qualified REIT dividends or non-service business income. The new $400 minimum is tied to active qualified businesses, so don’t assume it applies to an SSTB above the range.

Does the QBI deduction reduce self-employment tax?

No. It reduces taxable income for income tax only. Self-employment tax is still calculated on your full net earnings.

Does my S corp salary count as QBI?

No. Reasonable compensation from an S corporation is excluded from QBI, just like guaranteed payments from a partnership. It does count as W-2 wages for the wage limit.

Who qualifies for the new $400 minimum deduction?

Starting in 2026, taxpayers with at least $1,000 of QBI from active qualified businesses in which they materially participate. It sets a floor for owners whose calculated deduction would otherwise be smaller, and it’s indexed for inflation after 2026.

Which form do I use?

Form 8995 if your taxable income before the deduction is at or below the threshold and you have QBI, otherwise Form 8995-A with its schedules. Your preparer will use whichever your income requires.

This guide is general information, not tax, legal or accounting advice for your situation. Rules and inflation-adjusted figures change; confirm current-year details with a credentialed professional before acting.