A 20% deduction for business owners
The Section 199A qualified business income deduction lets owners of pass-through businesses deduct up to 20% of their qualified business income. It applies to sole proprietors, partnerships, S-corp shareholders, and many rental owners, but not to C corporations, which got a permanently lower corporate rate instead. Made permanent by the 2025 OBBBA legislation, it's the largest deduction most self-employed people will ever claim: on $100,000 of profit, it removes $20,000 from taxable income.
It's a below-the-line deduction you get either way
QBI is unusual. It isn't an above-the-line adjustment (it doesn't reduce your AGI), but you also don't have to itemize to claim it. You take it in addition to the standard deduction. It reduces income tax only, and it's applied after your standard or itemized deduction, which is why the calculation depends on your taxable income as well as your business profit.
The two limits
The headline "20% of business income" is capped by two rules:
- The taxable income cap: your deduction can't exceed 20% of taxable income (excluding capital gains). If your business profit is high but your taxable income is low (because of a spouse's deductions, big retirement contributions, or losses) this cap bites.
- The wage and property limit: above the income threshold, the deduction is limited to the greater of 50% of W-2 wages your business paid, or 25% of wages plus 2.5% of the cost of qualified property. A solo owner with no employees and no equipment can lose most of the deduction at high income.
Below the threshold, under $201,750 (single) or $403,500 (joint), the wage-and-property limit and the SSTB rule do not apply, so you get 20%, still capped at 20% of taxable income less net capital gain. OBBBA also widened the phase-in range from 2026: the limits now come in gradually over $75,000 of income ($150,000 joint) instead of $50,000 ($100,000), so partial deductions survive further up the scale than they used to.
The new $400 minimum
OBBBA added a floor starting in 2026. If you have at least $1,000 of QBI from an active trade or business you materially participate in, your deduction is at least $400, even if the wage limit would otherwise reduce it to nothing. Both figures are inflation-adjusted after 2026. It is a small amount, but it means very small active businesses always get something.
It does not reduce self-employment tax
A common and expensive misunderstanding. QBI reduces your income tax only. Your self-employment tax of 15.3% is still calculated on your full net profit. So a $20,000 QBI deduction in the 22% bracket saves $4,400 of income tax and nothing on SE tax.
Planning around the threshold
Because the deduction shrinks or disappears above the income threshold, anything that lowers taxable income near that line is doubly valuable: a solo 401(k) contribution, for example, can restore a partially phased-out QBI deduction and cut the tax on the remaining income at the same time. Entity choice matters too: paying yourself W-2 wages through an S-corp creates the wages that the wage limit tests against. Model that trade-off in the S-corp vs LLC calculator. Given the complexity above the threshold, high-income owners should confirm the final figure with a tax professional.