How Does the Qualified Business Income (Section 199A) Deduction Work in 2026?

Section 199A allows owners of sole proprietorships, partnerships, S corporations and LLCs taxed as partnerships to deduct up to 20 percent of qualified business income, subject to limits. C corporations do not qualify. The deduction is available whether the owner itemizes or takes the standard deduction, and it does not affect self-employment tax.

The One Big Beautiful Bill Act, signed in July 2025, made the deduction permanent. It also added a minimum deduction of $400 for taxpayers with at least $1,000 of qualified business income from a trade or business in which they materially participate, effective for 2026.

For 2026, the full deduction applies below $403,500 of taxable income for married filing jointly and $201,750 for other filing statuses. Above those amounts, the deduction becomes subject to limits based on W-2 wages paid and the unadjusted basis of qualified property, with the phase-out complete at $553,500 for married filing jointly and $276,750 for other filers.

The numbers are inflation-adjusted each year, so owners should confirm the current thresholds before year-end planning. The IRS publishes the annual figures in its inflation-adjustment revenue procedure and in the Form 8995 instructions.

Qualified businesses are pass-through trades or businesses. Specified service trades or businesses, which include health, law, accounting, consulting and financial services, also qualify for the full deduction below the thresholds, but the deduction phases out completely as income rises above them.

The service-business rules matter for many Pagac clients. A dental practice or a professional services firm is a specified service business, so the owner's taxable income determines whether the deduction is available at all. Manufacturing companies generally are not specified service businesses, so their owners can claim the deduction above the thresholds subject to the wage-and-property limits.

Entity structure affects the deduction. S corporation owners who take a reasonable salary reduce their qualified business income, because wages are not QBI, while sole proprietors and partners have no salary requirement but pay self-employment tax on their earnings. The trade-off between the QBI deduction and self-employment tax is a core reason entity choice matters.

The deduction is one input, not the only input, in entity and compensation decisions. Whether an S corporation, partnership or C corporation is right depends on the owner's goals, the business's circumstances and the full tax picture, subject to applicable law.