QBI Deduction 2026: Permanent Rules

For years the biggest question about the 20% Qualified Business Income deduction was whether it would survive past 2025. It did. The July 2025 tax law made §199A permanent and, for tax years beginning in 2026, made it somewhat more generous. This article explains how the deduction is calculated, what changed, where the income limits now sit, and the planning moves that still matter for owners of pass-through businesses.

The basic math

If you own a sole proprietorship, partnership, LLC, S corporation, or rental real estate that rises to the level of a trade or business, you may deduct up to 20% of your qualified business income. QBI is the net income from the business, excluding wages you pay yourself from an S corporation, guaranteed payments from a partnership, capital gains, dividends and interest not tied to the business.

The deduction is then capped at 20% of your taxable income minus net capital gains. It is taken after adjusted gross income, so it does not reduce self-employment tax, and it is available whether you itemize or claim the standard deduction. A consultant with $120,000 of Schedule C profit and taxable income of $95,000 would deduct the lesser of $24,000 (20% of QBI) or $19,000 (20% of taxable income), so $19,000.

Income thresholds and the wider phase-in

Below a taxable income threshold the deduction is unrestricted. For 2025 the threshold is $197,300 for single filers and $394,600 for married couples filing jointly; the 2026 amounts are indexed slightly higher. Above the threshold two things happen:

1. Wage and property test. For every business, the deduction is limited to the greater of 50% of W-2 wages the business pays, or 25% of W-2 wages plus 2.5% of the original cost of depreciable property. A business with no employees and no equipment can lose the deduction entirely at high income.
2. Specified service businesses (SSTBs). Doctors, dentists, lawyers, accountants, consultants, financial advisors, athletes and performers see the deduction phased out completely above the phase-in range. Engineers and architects are notably excluded from the SSTB list.

The phase-in range is where the 2026 change lands. Under the original law the deduction disappeared over a $50,000 band for singles and $100,000 for joint filers. Beginning in 2026 the band is $75,000 and $150,000. The practical effect is that a married physician with $500,000 of taxable income, who previously received nothing, now retains a partial deduction, and non-SSTB owners have more room before the wage test bites fully.

A new floor: the $400 minimum

Also starting in 2026, any taxpayer with at least $1,000 of QBI from a business in which they materially participate receives a minimum deduction of $400, indexed for inflation. This mainly helps very small side businesses and owners whose taxable income limitation would otherwise reduce the deduction below $400.

Rental real estate

Rentals qualify only if the activity is a trade or business. The IRS safe harbor requires 250 hours per year of rental services (by the owner, employees, or contractors), separate books for the rental enterprise, and contemporaneous time logs. Triple-net leases and a personal residence rented part of the year do not qualify. Many landlords with one or two properties fail the hours test but may still qualify under general trade-or-business principles; document the activity either way.

Planning moves that still matter

• S corporation salary. Owner wages reduce QBI but count toward the W-2 wage test. Above the threshold, a salary that is too low can actually cost you the deduction. There is an optimal point, usually somewhere near 28% of pre-wage profit, that a projection can identify.
• Retirement contributions. Contributions to a SEP or 401(k) reduce both taxable income and QBI. Below the threshold they cost you 20% of the deduction; near the threshold they can bring you under it and restore the full deduction. Run both scenarios.
• Aggregation. If you own several businesses, electing to aggregate them lets wages paid in one support the deduction for another. The election is binding in later years.
• Entity choice. Because the deduction is now permanent, the long-running comparison between an S corporation with QBI and a C corporation at 21% can be made on a long horizon rather than as a bet on sunset dates.
• Separating an SSTB. Splitting a medical practice's real estate or administrative services into a separate entity works only if the separate business has its own economic substance; the regulations treat 50%-commonly-owned businesses that mainly serve the SSTB as part of it.

Reporting

Form 8995 handles the simplified computation below the threshold; Form 8995-A applies above it and for aggregation, SSTB and rental safe harbor statements. Partnerships and S corporations must report each owner's share of QBI, W-2 wages and property basis on Schedule K-1 (Statement A); an owner cannot claim the deduction without those figures.

Summary

With permanence, a wider phase-in and a modest minimum deduction, §199A is now a stable feature of the tax landscape rather than a temporary windfall. The deduction rewards owners who manage wages, retirement contributions and entity structure with the thresholds in mind. A projection in the fourth quarter, while salary and contribution amounts can still be adjusted, is the single most effective step.

OKLEM CPA Group · Los Angeles Korean-speaking CPA Shin S. Oh · (213) 788-3388 · Individual and business tax, bookkeeping, payroll