The QBI deduction: How to claim your 20% tax break in 2026

If you own a small business, you may be eligible for one of the biggest tax breaks in the tax code: a 20% deduction on your qualified business income.

That's not a credit. It's a deduction—20% of your business profits that simply don't get taxed.

The short answer: The Qualified Business Income (QBI) deduction lets pass-through business owners deduct up to 20% of their business income. But there are income limits, industry restrictions, and complex calculations that determine how much you actually get.

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What is the QBI deduction?

The QBI deduction (also called the Section 199A deduction) was created by the Tax Cuts and Jobs Act of 2017—and made permanent by the One Big Beautiful Bill Act in July 2025. It's designed to give pass-through business owners a tax break similar to the corporate tax rate reduction that C-corps received. Most owners claim it on Form 8995.

Who qualifies?

• Sole proprietors (Schedule C filers)
• Partners in partnerships
• S-corporation shareholders
• LLC members (depending on how taxed)
• Some trust and estate beneficiaries

Who doesn't qualify?

• C-corporation owners (different tax rules)
• W-2 employees (you're not a business owner)
• Certain service businesses above income thresholds (more on this below)

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The basic calculation

At its simplest:

QBI Deduction = 20% × Qualified Business Income

If your business earns $100,000 in qualified business income, you can deduct $20,000—reducing your taxable income without doing anything special.

Example: A Richardson marketing consultant earns $150,000 in net business income.

• QBI deduction: $150,000 × 20% = $30,000
• At the 24% tax bracket, that's $7,200 in tax savings

That's real money, just for owning your business as a pass-through entity.

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The income limits

Here's where it gets complicated. The QBI deduction has income thresholds that can limit or eliminate it entirely.

2026 thresholds (adjusted for inflation)

Per Rev. Proc. 2025-32, the 2026 thresholds are:

*For specified service businesses only

(The One Big Beautiful Bill Act widened these phase-out ranges to $75,000 for single filers and $150,000 for joint filers starting in 2026—so more business owners keep at least a partial deduction.)

What "taxable income" means

These thresholds are based on your total taxable income, not just business income. That includes:

• Your business profit
• Your spouse's W-2 income
• Investment income
• Rental income
• Everything

So if you're married and your spouse has a high-paying job, your combined income might push you into the phase-out zone even if your business income is modest.

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The service business problem

Certain service businesses face stricter rules. The IRS calls these Specified Service Trades or Businesses (SSTBs).

What's an SSTB?

• Health (doctors, dentists, therapists)
• Law (attorneys, paralegals)
• Accounting (CPAs, tax preparers—yes, even me)
• Actuarial science
• Performing arts
• Consulting
• Athletics
• Financial services
• Brokerage services
• Any business where reputation or skill is the principal asset

How SSTB rules work

Below the threshold: Full 20% deduction regardless of business type.

In the phase-out range: SSTB deduction is reduced proportionally.

Above the threshold: SSTBs get zero QBI deduction. Completely phased out.

Example: A Plano attorney (SSTB) with $450,000 taxable income (MFJ):

• In the phase-out range ($403,500 - $553,500)
• QBI deduction reduced to roughly 69% of the full amount
• Above $553,500? Zero deduction.

The same $450,000 earned by a non-SSTB (like a construction business) gets the full 20% deduction, subject to W-2 wage and property limits.

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The W-2 wage and property limits

For higher-income non-SSTB businesses, there's another limitation: the W-2 wage and property limit.

Once you exceed the income threshold, your QBI deduction is limited to the greater of:

1. 50% of W-2 wages paid by the business, OR
2. 25% of W-2 wages + 2.5% of the unadjusted basis of qualified property

What this means in practice

If your business pays significant W-2 wages (including to yourself if you're an S-corp), you can claim a larger QBI deduction.

If your business has substantial depreciable property (equipment, buildings), that helps too.

Example: A Frisco manufacturing company:

• QBI: $500,000
• W-2 wages paid: $200,000
• Qualified property: $1,000,000

Potential QBI deduction (20%): $100,000

W-2 wage limit (50%): $200,000 × 50% = $100,000

Alternative limit: ($200,000 × 25%) + ($1,000,000 × 2.5%) = $50,000 + $25,000 = $75,000

Greater of the two: $100,000

QBI deduction allowed: $100,000 (full amount)

This business's wages are sufficient to claim the full deduction.

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Strategies to maximize your QBI deduction

Strategy 1: Stay below the threshold

If you're near the income threshold, consider strategies to reduce taxable income:

• Maximize retirement contributions (SEP-IRA, Solo 401k)
• Time income and deductions strategically
• Consider charitable giving (donor-advised funds)
• Health Savings Account (HSA) contributions

Reducing taxable income from $420,000 to $400,000 (MFJ) moves you from the phase-out zone to the full deduction zone.

Strategy 2: Pay yourself W-2 wages (S-Corps)

If you're above the threshold with a non-SSTB business, paying yourself (and employees) W-2 wages increases your wage limit.

But be careful: W-2 wages are subject to payroll taxes, so there's a trade-off. Run the numbers with your CPA.

Strategy 3: Aggregate businesses

If you own multiple businesses, you may be able to aggregate them for QBI purposes. This can help if one business has high wages and another doesn't.

Aggregation has specific rules—the businesses must be related and commonly controlled.

Strategy 4: Consider entity structure

For some SSTBs, restructuring the business can help. For example:

• Spinning off non-service components into separate entities
• Converting administrative functions to separate businesses

This is complex and requires careful planning—don't try it without professional guidance.

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QBI for real estate investors

Good news for DFW real estate investors: rental income generally qualifies for the QBI deduction.

Safe harbor for rentals

To ensure your rental qualifies, you can use the IRS safe harbor:

• 250+ hours of rental services per year
• Maintain separate books and records
• Keep contemporaneous logs

Real estate professional status

If you qualify as a real estate professional, your rental activities definitely qualify for QBI—and you get additional tax benefits for passive losses.

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Common QBI mistakes

Mistake 1: Assuming you're an SSTB when you're not

"Consulting" has a specific IRS definition. Many businesses that call themselves consultants aren't actually SSTBs. If you provide a product or specific service (not just advice), you may not be an SSTB.

Mistake 2: Ignoring the deduction entirely

Some tax software doesn't optimize QBI calculations. If your preparer isn't asking about your business structure and wages, they may be leaving money on the table.

Mistake 3: Not considering S-Corp election

Sole proprietors above the threshold with non-SSTB businesses often benefit from S-corp election—it creates W-2 wages that increase the QBI limit.

Mistake 4: Forgetting aggregation

If you own multiple businesses, aggregating them can optimize your QBI deduction. But you must make the election and maintain it consistently.

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Will QBI expire?

No. The QBI deduction was originally scheduled to expire after 2025, but the One Big Beautiful Bill Act (P.L. 119-21), signed July 4, 2025, made it permanent.

The law also sweetened the deal starting in 2026:

• Wider phase-out ranges ($75,000 single / $150,000 MFJ), so partial deductions extend further up the income scale
• A new minimum deduction of $400 for taxpayers with at least $1,000 of qualified business income from businesses they actively participate in (both amounts adjust for inflation)

Translation: This is now a durable part of the tax code. Build it into your long-term planning, not just this year's return.

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The bottom line

The QBI deduction is one of the most valuable tax breaks for small business owners—potentially saving you thousands of dollars every year.

But the rules are complex: income limits, SSTB restrictions, wage requirements, and aggregation elections all affect how much you can claim.

If you're a DFW business owner and aren't sure you're maximizing your QBI deduction, let's take a look. A quick analysis can identify opportunities you might be missing.

Not sure if you're getting the full 20%? Let's check →

— Krystal Le, CPA

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LeCPA helps pass-through business owners across Plano, Richardson, Frisco, and Dallas maximize tax deductions and plan strategically.

Sources:

• IRS: Qualified Business Income Deduction
• IRS: About Form 8995, Qualified Business Income Deduction Simplified Computation
• IRS Rev. Proc. 2025-32 (2026 Inflation Adjustments)