By Mica Dauch
If you own a small business, one of the most valuable tax breaks available to you may be one you’ve never had to think much about: the Qualified Business Income (QBI) deduction. Thanks to recent legislation, it is also a break you can count on long term.
What Counts as Qualified Business Income?
Qualified Business Income, or QBI, is the net income your business generates from a qualified trade or business, not including certain investment income, reasonable compensation paid to yourself as an S corporation shareholder, or guaranteed payments to partners.
The deduction, formerly known as the Section 199A Deduction, is available to owners of pass-through entities, meaning the business’s income “passes through” to the owner’s individual tax return rather than being taxed at the entity level. That includes:
- Sole proprietorships
- Partnerships
- S corporations
- Limited liability companies (LLCs) taxed as any of the above
C corporations do not qualify, since their income is already taxed under a separate corporate tax structure rather than passed through to the owner.
What You Can Deduct
Eligible taxpayers can deduct up to 20% of their qualified business income. On top of that, you can also deduct 20% of qualified REIT dividends and qualified income from publicly traded partnerships (PTPs), even if you do not otherwise own a qualifying trade or business.
One of the more owner-friendly features of this deduction is that you do not have to itemize to claim it. It is available whether you take the standard deduction or itemize, making it one of the few deductions that benefits nearly every eligible business owner, regardless of how the rest of their return is structured.
Now a Permanent Part of the Tax Code
When the QBI deduction was first created under the Tax Cuts and Jobs Act of 2017, it came with an expiration date; it was scheduled to sunset at the end of 2025. That changed with the passage of the One Big Beautiful Bill Act (OBBBA), signed into law in 2025, which made the Section 199A deduction permanent. Small business owners can now build long-term tax planning around this deduction rather than treating it as a temporary window.
The updated rules apply starting with the 2026 tax year.
2026 Income Thresholds
The QBI deduction is limited by income, and the limits are adjusted for inflation each year. For 2026, the thresholds are:
- Single: phase-out begins at $201,750 and ends at $276,750
- Married Filing Jointly: phase-out begins at $403,500 and ends at $553,500
If your taxable income falls below the phase-out threshold for your filing status, you don’t need to worry about the W-2 wage limitation; you are eligible for the full 20% deduction on your qualified business income, with no additional tests required.
If your income falls above the phase-out range, the calculation gets more involved. Under the OBBBA, the phase-in range was widened from $50,000 to $75,000 for single filers and from $100,000 to $150,000 for joint filers, giving business owners near the threshold a more gradual transition rather than a hard cutoff.
The Wage and Property Test for Higher-Income Owners
Once you are above the phase-out threshold, your deduction is limited to the greater of:
- 50% of W-2 wages paid by the business, or
- 25% of W-2 wages paid, plus 2.5% of the unadjusted basis immediately after acquisition (UBIA) of qualified property
This test matters most for owners of capital-intensive businesses (think equipment, real estate, or machinery) or businesses that pay significant payroll, since either wages or qualified property can support a larger deduction. It also affects specified service trades or businesses (SSTBs), such as many professional services, consulting, and financial services firms, which face additional restrictions once income exceeds the phase-out range, so it is worth reviewing your entity’s classification with a tax professional if this applies to you.
A New Minimum Deduction
The OBBBA also introduced a small but meaningful floor: starting with the 2026 tax year, taxpayers with at least $1,000 of qualified business income from a trade or business in which they materially participate are guaranteed a minimum QBI deduction of $400, even if the standard 20% calculation would produce less. This amount is indexed for inflation in future years.
Why This Matters for Your Business
For many small business owners, the QBI deduction can meaningfully lower the effective tax rate on business income, often making the difference between paying tax as if you earned the income personally and getting a real break for the risk of running a business. Because it is now permanent, it is worth incorporating into multi-year planning: entity structure decisions, the timing of income and wages, retirement plan contributions, and equipment purchases can all interact with your QBI calculation.
Every business situation is different, especially once income approaches the phase-out thresholds or W-2 wage and property tests come into play. If you are not sure how the QBI deduction applies to your business, or how to plan around the 2026 thresholds, reach out to one of the Bluespring Wealth River Valley advisors with any questions.
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