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The QBI Deduction (Section 199A) Explained
Section 199A lets eligible owners of pass-through businesses deduct up to 20% of qualified business income. Legislation in 2025 made the deduction permanent.
Who can claim it
The deduction is for individuals, and certain trusts and estates, with income from sole proprietorships, partnerships, and S corporations. C corporations cannot claim it. It is taken below AGI, and the taxpayer does not need to itemize.
Qualified business income is generally net business income from a U.S. trade or business. It excludes wages paid to the owner, guaranteed payments, and most investment income.
Income limits
Below a taxable income threshold, the calculation is simple: generally 20% of QBI, limited to 20% of taxable income minus net capital gain. Above the threshold, a limit based on W-2 wages and qualified property can reduce it.
Specified service businesses
Specified service trades or businesses include fields such as health, law, accounting, and consulting. Above the income range, owners of these businesses lose the deduction.
Most filers use Form 8995, while those with higher income or more complex situations use Form 8995-A.
Worked example below the threshold
A sole proprietor has $100,000 of QBI and $90,000 of taxable income before the deduction, with no net capital gain. The first figure is 20% of QBI, or $20,000. The overall limit is 20% of taxable income, or $18,000. The deduction is therefore $18,000.
QBI itself is reduced by related deductions, such as the deductible part of self-employment tax, self-employed health insurance, and retirement contributions. Preparers often miss this step.
The wage and property limit
Above the threshold, the deduction for each business is generally limited to the greater of 50% of W-2 wages, or 25% of W-2 wages plus 2.5% of the unadjusted basis of qualified property. A phase-in range applies between the threshold and the full limit.
For example, a partnership allocates $400,000 of QBI to a high-income partner, along with $100,000 of W-2 wages and no qualified property. The tentative amount is $80,000, but the limit is $50,000. Owners of capital-heavy businesses with few employees may rely on the property portion instead.
Aggregation and rental real estate
Taxpayers can elect to aggregate businesses that meet common ownership and other tests, which can combine wages and property across them. Once made, aggregation generally must continue in later years, and specified service businesses cannot be aggregated.
Rental real estate can qualify if it rises to the level of a trade or business. Revenue Procedure 2019-38 offers a safe harbor, with requirements that include separate records and at least 250 hours of rental services a year in many cases.
Losses and other details
A net QBI loss from all businesses in a year carries forward and reduces QBI in the next year. Losses suspended under other rules generally come into QBI when they are allowed.
Items excluded from QBI include capital gains, dividends, interest not properly allocable to a business, reasonable compensation paid to the owner, and guaranteed payments. Certain REIT dividends and publicly traded partnership income have their own component and are not subject to the wage limit.
The 2025 legislation also widened the phase-in range and added a small minimum deduction for certain active owners, beginning in 2026. Confirm the current figures when preparing a return.
A preparer's checklist
Start by confirming that each activity is a qualified U.S. trade or business, and identify any specified service business. Next, compare taxable income with the threshold for the filing status and year, because that decides whether the wage and property limits apply.
For each business, gather QBI, W-2 wages, and the unadjusted basis of qualified property, which pass-through entities should report on the K-1 or a statement. Reduce QBI for the deductible part of self-employment tax, self-employed health insurance, and retirement contributions. Bring in any negative QBI carried over from the prior year.
Finally, apply the overall limit based on taxable income minus net capital gain, and keep the workpaper. It will be needed next year for carryovers, and it supports any aggregation election disclosed on the return. Repeat the review each year, because thresholds and business facts can both change.
Key takeaways
- The deduction can reach 20% of QBI.
- W-2 wage and property limits apply above the threshold.
- Specified service businesses face tighter limits.
Frequently asked questions
Is the QBI deduction available if I take the standard deduction?
Yes. It is available whether a taxpayer itemizes or takes the standard deduction, but it is not an adjustment in reaching AGI.
Are W-2 wages QBI?
No. Wages an employee earns are not QBI, and neither is reasonable compensation an S corporation pays its shareholder-employee.
Does the deduction reduce self-employment tax?
No. It affects income tax only.
For general education only, not tax advice. Tax law changes often, so confirm current rules and amounts with primary sources.