QBI Deduction 2026: Section 199A Explained (with Sunset Watch)
By the 3Tej Research Desk · Published May 23, 2026 · 3 min read
- Up to 20% of qualified business income deductible against taxable income
- Income limits 2026: 197,300 USD single / 394,600 USD MFJ before phase-out begins
- Below limit: full 20% available regardless of business type
- Above limit: SSTBs (law, health, consulting, finance) phase out entirely; non-SSTB face wage/asset tests
- Scheduled to SUNSET on December 31, 2025 unless Congress extends
The Qualified Business Income deduction (Section 199A of the Internal Revenue Code) was created by the 2017 Tax Cuts and Jobs Act to give pass-through business owners parity with C-corporations, which had their headline rate cut from 35% to 21%. Pass-through owners (sole props, partnerships, most LLCs, S-corps) instead got a 20% deduction against their qualified business income. The deduction is one of the most valuable tax breaks for small business owners; it is also one of the most complicated, and it is scheduled to sunset at the end of 2025 unless Congress acts.
What QBI is and is not
Qualified Business Income is the NET income of a qualified trade or business after deductions for expenses, depreciation, and self-employment tax (half). It excludes:
- Capital gains and capital losses
- Dividend income (with REIT/PTP exception)
- Interest income not allocable to the trade or business
- Reasonable compensation paid to S-Corp owners (the wage part)
- Guaranteed payments to partners
- Foreign business income
The 20% deduction applies only to what is LEFT after these exclusions. So if you have a 200,000 USD S-Corp net income that includes 50,000 USD of capital gains and 80,000 USD reasonable salary to yourself, QBI is 70,000 USD; the 20% deduction is 14,000 USD.
Income limits and phase-outs (2026)
| Filing status | Full QBI available below | Phase-out range | QBI denied above (SSTB) |
|---|---|---|---|
| Single | 197,300 USD | 197,300 to 247,300 | 247,300 USD |
| MFJ | 394,600 USD | 394,600 to 494,600 | 494,600 USD |
| Head of household | 197,300 USD | 197,300 to 247,300 | 247,300 USD |
BELOW the lower threshold, the 20% deduction is available regardless of business type or other tests. WITHIN the phase-out, the deduction is partially limited. ABOVE the upper threshold, SSTBs (Specified Service Trade or Business) get NO QBI deduction at all; non-SSTB businesses face the W-2 wages or UBIA (Unadjusted Basis Immediately after Acquisition) of qualified property tests.
What is an SSTB?
Specified Service Trade or Business categories that LOSE the deduction above the income limit:
- Health (doctors, dentists, physical therapists, nurses, veterinarians)
- Law (attorneys, paralegals)
- Accounting and actuarial services
- Performing arts (actors, musicians, athletes who are paid for their performance)
- Consulting
- Athletics
- Financial services and investment management
- Brokerage services
- Any business where the principal asset is the reputation or skill of one or more employees
Notably EXCLUDED from SSTB: engineering, architecture, real estate, retail, manufacturing. These continue to qualify above the income limit, subject to the wage/UBIA tests rather than the SSTB exclusion.
Worked example: physician LLC at varying income
| Scenario | Net QBI | Taxable income (joint) | QBI deduction |
|---|---|---|---|
| Resident, S-Corp, low income | 85,000 USD | 120,000 USD | 17,000 USD (full 20%) |
| Early attending | 200,000 USD | 390,000 USD | 40,000 USD (still below MFJ limit) |
| Mid-career attending | 300,000 USD | 450,000 USD | Partial phase-out, ~28,000 USD |
| Senior partner | 500,000 USD | 650,000 USD | 0 USD (SSTB above upper threshold) |
The SSTB rule creates a sharp cliff for high-income service professionals. A two-physician MFJ household with 500,000 USD income loses the QBI deduction entirely, while a 500,000 USD engineering firm income might still qualify via the wages/UBIA test.
The 2025 sunset (and what to do)
Section 199A is scheduled to expire on December 31, 2025. If Congress does not extend it, tax years 2026 and later have NO QBI deduction. As of mid-2026, the legislative status is uncertain.
- Tax planning under uncertainty. Plan for both scenarios. Some firms are accelerating income into 2025 (last guaranteed QBI year) and deferring deductions to 2026 if extension fails.
- Watch for extension legislation. Most political analysts expect SOME version of QBI to continue, but exact terms (income thresholds, SSTB rules, sunset date) are unsettled.
- S-Corp election may become MORE valuable. If QBI sunsets, the S-Corp's self-employment-tax savings remain. The combined value of S-Corp vs pure pass-through changes when QBI disappears.
Frequently asked questions
Who qualifies for the QBI deduction?
Owners of pass-through businesses: sole proprietorships, single-member LLCs, multi-member LLCs taxed as partnerships, partnerships, and S-corporations. C-corporations do NOT qualify (they got the 21% corporate rate instead). Real estate rental income may qualify if it rises to the level of a trade or business (safe harbor for 250+ hours of activity).
What is the maximum QBI deduction?
20% of qualified business income, capped by 20% of (taxable income minus net capital gains). For a high earner the cap often binds; the QBI calculation does not exceed 20% of taxable income overall.
Does the QBI deduction reduce my self-employment tax?
No. QBI reduces income tax only. Self-employment tax (15.3% up to the SS cap, 2.9% above) is calculated on NET SE income BEFORE the QBI deduction. The QBI deduction is on Form 1040 line 13, applied to taxable income.
Will the QBI deduction be extended past 2025?
Unknown as of mid-2026. Most observers expect SOME extension because of pass-through political constituency, but the exact form (full extension, modified income limits, narrower SSTB definition) is unsettled. Plan for both extension and sunset scenarios.
What is the difference between the W-2 wages and UBIA tests?
These are the limitations that apply to non-SSTB businesses ABOVE the income threshold. The 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 the unadjusted basis of qualified property. Capital-intensive businesses with low payroll (real estate, manufacturing) use test (b); service businesses with high payroll use test (a).
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Sources and methodology
Numbers on this page are sourced from official government / regulator websites and refreshed automatically every Sunday by our build pipeline. Hover any number with a dotted underline to see its source and as-of date.
Tax authorities cited (8 jurisdictions)
Methodology: each calculator linked from this post documents its formula. Live market data (FX, treasury yields, mortgage rates) is pulled from public APIs (exchangerate.host, FRED, BoE, ECB, BoC, CoinGecko, stooq).