The QBI deduction explained for LLC and S-corp owners

If you own an LLC, an S corporation, a partnership, or a sole proprietorship, the qualified business income deduction can remove up to 20% of your business profit from your taxable income, and since the One Big Beautiful Bill Act made it permanent in July 2025 it is something to plan around every year rather than a provision that is about to expire.

The qualified business income (QBI) deduction, also called the Section 199A deduction, lets owners of pass-through businesses deduct up to 20% of their qualified business income when they calculate income tax. It lowers income tax but not self-employment tax, and you can claim it whether you take the standard deduction or itemize. For 2026, if your taxable income before the deduction is at or below $201,750 as a single filer or $403,500 on a joint return, the math is simple: the deduction is 20% of your QBI, limited to 20% of your taxable income minus net capital gains. Above those amounts, the kind of business you run and the W-2 wages and property it has start to limit the deduction, gradually over a range of $75,000 for single filers and $150,000 for joint filers. There is also a new $400 minimum deduction for owners who actively work in their business and have at least $1,000 of QBI.

The deduction applies to pass-through income, not to wages or C-corporation profit

The deduction is available to anyone who owns a business whose profit flows through to their personal return, which covers sole proprietors, single-member LLCs, partners, members of multi-member LLCs, and S corporation shareholders. It is not available to C corporations, which pay their own tax at a flat 21% rate and have nothing to pass through, and it does not apply to the wages you earn as an employee of someone else.

The deduction is taken on Form 1040 after you calculate adjusted gross income, which means it reduces your taxable income without reducing your AGI. That detail rarely matters for planning, but it explains why the deduction shows up as its own line rather than as a business expense on Schedule C.

Qualified business income is the net amount of income, gain, deduction, and loss from a trade or business conducted in the United States. The word net matters, because QBI is not your gross profit: you subtract the deductions that are attributable to the business and that sit on your personal return, namely half of your self-employment tax, your self-employed health insurance deduction, and the deduction for retirement plan contributions you make for yourself. Several kinds of income never count as QBI, including the W-2 wages an S corporation pays you, guaranteed payments a partnership pays you for services, capital gains and losses, and most interest and dividends. If your business has a net loss for the year, the loss carries forward and reduces your QBI in the next year, so it is worth keeping track of rather than letting it disappear.

The income also has to come from a trade or business rather than an investment, and you do not have to materially participate to claim the ordinary deduction, although you do for the new $400 minimum. Rental real estate qualifies in some cases and not in others, and the IRS offers a safe harbor for rental owners who perform at least 250 hours of rental services a year (in three of five years for older rentals), keep separate books, and attach a statement to the return, although failing the safe harbor does not by itself rule out a rental that otherwise qualifies as a trade or business, so owners with rentals should confirm their treatment with a preparer rather than assuming it.

What changed for 2026 under the One Big Beautiful Bill Act

Before July 2025, the deduction was scheduled to end after the 2025 tax year. The One Big Beautiful Bill Act removed that end date, so the deduction is now a permanent part of the tax code. It made two other changes that start in 2026.

The first is the minimum deduction. If you have at least $1,000 of QBI from active businesses in which you materially participate, you are entitled to a deduction of at least $400. It works as a floor that replaces a smaller ordinary result rather than an extra $400 on top of it, so it mainly helps owners with small profit who would otherwise see a very small deduction. Both the $1,000 and the $400 are fixed for 2026 and will be adjusted for inflation starting in 2027.

The second is a wider phase-in range. The income limits that restrict the deduction for service businesses and cap it by wages and property used to phase in over $50,000 for single filers and $100,000 for joint filers. For 2026 and later years that range widens to $75,000 and $150,000, so owners just above the threshold lose their deduction more gradually than before. The 2026 threshold amounts, set in Revenue Procedure 2025-32, are $201,750 for single filers and heads of household, $403,500 for joint filers, and $201,775 for married people filing separately, which means the limits are fully phased in at $276,750 for single filers and $553,500 for joint filers.

Below the threshold the math is simple

If your taxable income before the QBI deduction is under the threshold for your filing status, you take the lesser of two numbers: 20% of your QBI, or 20% of your taxable income after subtracting any net capital gain. You report it on Form 8995, which is the short form, and no limits for wages, property, or type of business apply.

A worked example shows how the two limits interact. Say you are a single filer with a sole proprietorship that earned $90,000 of net profit on Schedule C and you have no other income. Your self-employment tax is about $12,717, and half of it, about $6,358, is deductible on your personal return, so your QBI is $90,000 minus $6,358, or $83,642. Your adjusted gross income is the same $83,642, and after the 2026 standard deduction of $16,100 your taxable income before the QBI deduction is $67,542.

Twenty percent of your QBI is $16,728, but twenty percent of your taxable income is $13,508, and the deduction is the smaller of the two, so you deduct $13,508. At the 22% bracket that deduction saves about $2,970 in federal income tax. Your self-employment tax is still $12,717, because the QBI deduction is calculated after that tax and does not touch it.

Most small business owners fall into this simple category, and for them the planning question is usually about the taxable income cap rather than the more complicated limits. An owner with large deductions or other losses can end up with a smaller deduction than 20% of QBI, and that is normal rather than a mistake.

Above the threshold the type of business and your payroll start to matter

Once your taxable income passes the threshold, two limits begin to apply, and you calculate the deduction on Form 8995-A instead of Form 8995.

The first limit applies to specified service trades or businesses, usually shortened to SSTBs. These are businesses in health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, and investing, trading, or dealing in securities, partnership interests, or commodities, along with a narrow catch-all for businesses whose income comes from endorsements, licensing the owner's name or likeness, or appearances. Engineering and architecture are not treated as SSTBs. If you own an SSTB, the portion of your income that qualifies shrinks as your taxable income moves through the phase-in range and disappears entirely above $276,750 for single filers or $553,500 for joint filers in 2026.

The second limit ties the deduction to the business's payroll and property, and it applies fully to businesses that are not SSTBs and partly to whatever portion of an SSTB's income still qualifies inside the phase-in range. For each business, the deduction cannot exceed the greater of 50% of the W-2 wages the business pays, or 25% of those wages plus 2.5% of the unadjusted basis of qualified property the business holds, such as equipment and buildings. A consulting firm with no employees and little equipment can be squeezed by this limit when profit is high, while a business with a full payroll or a lot of equipment is more likely to keep its full 20%. Within the phase-in range the limits apply gradually rather than all at once, which is the part of the rule the new law made more forgiving.

If you own more than one business, the deduction is calculated for each one and then combined, and the rules let you aggregate businesses in some circumstances, which can help when one business pays the wages and another holds the property.

How your entity type changes the number

The mechanics differ by structure, and knowing which applies to you is most of the work.

Sole proprietors and single-member LLCs. Your QBI is your Schedule C net profit after subtracting half of your self-employment tax, your self-employed health insurance deduction, and any retirement contributions you deduct for yourself. Our guide to how single-member LLCs are taxed covers the Schedule C and self-employment tax side of the calculation.

Partners and multi-member LLC members. Your QBI is your share of the partnership's qualified income, reported to you on your Schedule K-1, and guaranteed payments you receive for services are excluded from QBI. That exclusion is one reason a member who works in the business may prefer to be paid through a distribution share rather than a guaranteed payment, although the self-employment tax and partnership agreement consequences need to be weighed alongside it.

S corporation shareholders. The salary the S corporation pays you is W-2 wages and does not count as QBI, but your share of the company's profit on your Schedule K-1 does, and the W-2 wages the company pays, including your own, count toward the wage limit that applies at higher incomes. This is where the QBI deduction and reasonable compensation interact. As a simplified illustration, raising your salary by $10,000 reduces your QBI by the same $10,000, which trims the deduction by up to $2,000 and costs roughly $440 in tax at the 22% bracket, while the extra salary adds up to about $1,530 in combined payroll tax at 15.3% before the company's deduction for its half. Below the threshold the payroll tax effect is usually larger than the QBI effect, but the real numbers depend on the Social Security wage base, the taxable income cap, and the rest of your return, so no single salary-to-distribution ratio is reliable. Above the threshold the wages can help lift the wage limit, which is why higher-income owners need to model the whole return rather than pick a salary from a rule of thumb, and the salary still has to be reasonable for the work you do. Our guide on salary versus distributions explains how the two are taxed.

The deduction does not reduce self-employment tax

The QBI deduction lowers your income tax and nothing else. Self-employment tax is calculated on your net profit before the deduction, and the deduction does not reduce your adjusted gross income either, so it does not change benefits that depend on AGI. Owners who expect the deduction to cut their self-employment tax are often surprised in April, because for a sole proprietor earning a modest profit, the self-employment tax is frequently larger than the federal income tax the deduction is helping to reduce.

Mistakes that cost owners the deduction

Counting S corporation salary as QBI. The salary is wages, and including it overstates the deduction and invites a notice.

Forgetting to subtract the personal-return adjustments. QBI is reduced by half of self-employment tax, self-employed health insurance, and retirement contributions, and leaving those out overstates the deduction in a way that shows up only if the return is reviewed.

Missing the taxable income cap. Owners with a lot of other deductions sometimes expect 20% of their profit and get less, and the cap based on taxable income is the reason.

Misclassifying a service business. Above the threshold, treating an SSTB as a regular business, or the reverse, changes the result significantly, and the line between consulting and other services is not always obvious.

Losing track of a QBI loss. A year with a loss reduces next year's deduction, and a carryforward that is not tracked is simply lost.

Not claiming it at all. Tax software calculates the deduction automatically for most returns, but owners who file late, file by hand, or hand books to a preparer who is not looking for it can leave the deduction off, which is worth checking for any open year.

Where Inkle fits

Inkle's tax team prepares Forms 1040, 1065, and 1120-S, so the QBI calculation is built from the same books and Schedule K-1 figures as the return itself, and our bookkeepers keep owner pay, distributions, and payroll separate so wages and QBI do not get mixed together. Inkle handles bookkeeping and tax for owner-operated businesses across the US.

See how it works or book a demo to talk through what your business needs.

Frequently asked questions

Is the QBI deduction permanent?

Yes. The One Big Beautiful Bill Act, signed in July 2025, removed the scheduled expiration after 2025, so the Section 199A deduction is now a permanent part of the tax code. It also added a $400 minimum deduction and widened the phase-in range for tax years beginning in 2026.

Does an S corporation owner qualify for the QBI deduction?

Yes. An S corporation shareholder can deduct up to 20% of their share of the company's qualified business income, but the W-2 salary the company pays them is not QBI. The wages the company pays do count toward the wage limit that applies at higher income levels.

Does the QBI deduction reduce self-employment tax?

No. It reduces only federal income tax. Self-employment tax is calculated on your net profit before the deduction and is not affected by it.

What is the $400 minimum QBI deduction?

For tax years beginning after 2025, an owner who materially participates in an active business and has at least $1,000 of qualified business income is entitled to a deduction of at least $400, which replaces a smaller ordinary result rather than adding $400 on top of it. Both amounts are fixed for 2026 and adjusted for inflation starting in 2027.

Should I use Form 8995 or Form 8995-A?

Use the simpler Form 8995 if your taxable income before the deduction is at or below the 2026 threshold, which is $201,750 for single filers and $403,500 for joint filers. Use Form 8995-A if your income is above the threshold or you have items the short form does not handle, such as being a patron of a specified agricultural or horticultural cooperative. Owning a service business does not by itself require the longer form if your income is below the threshold.

Do I have to itemize to claim the QBI deduction?

No. The deduction is available whether you take the standard deduction or itemize, because it reduces taxable income rather than being an itemized deduction.