What Is the QBI Deduction?
The Qualified Business Income (QBI) deduction under IRC §199A allows owners of pass-through businesses to deduct up to 20% of qualified business income from their taxable income. For 2026 and beyond, the OBBBA increased this to 23% and made the deduction permanent.
QBI includes net income from:
- Schedule C (sole proprietor / single-member LLC)
- S-Corporation K-1 Box 1 ordinary business income
- Partnership K-1 Box 1 (taxpayer's share)
- Qualified REIT dividends (§199A(e)(3))
- Qualified publicly traded partnership (PTP) income
Not included: W-2 wages received by the taxpayer, guaranteed payments for services (§707(c)), capital gains/losses, investment income, or C-Corporation income.
2025 vs 2026 Thresholds
| Filing Status | 2025 Threshold | 2025 Phase-In Ends | 2026 Threshold | 2026 Phase-In Ends |
|---|---|---|---|---|
| MFJ | $394,600 | $494,600 | $403,500 | $553,500 |
| Single / HOH | $197,300 | $247,300 | $201,750 | $276,750 |
| MFS | $197,300 | $247,300 | $201,775 | $276,775 |
OBBBA changes for 2026+: Rate increases from 20% to 23%. Phase-in range expands to $75K/$150K. SSTB limitations are removed entirely. §199A made permanent (was set to expire after 2025).
The 3-Tier Calculation System
Which calculation applies depends on your taxable income (before the QBI deduction) relative to the threshold:
| Your Situation | Calculation |
|---|---|
| Taxable income ≤ threshold | Tier 1 (Simple): Deduction = lesser of 20% × QBI or 20% × taxable income. No W-2/UBIA limitation. SSTB status irrelevant. |
| Above threshold, non-SSTB | Tier 2: 20% × QBI minus reduction based on W-2/UBIA limitation and phase-in fraction. |
| Above threshold, SSTB (2025 only) | Tier 3: QBI, W-2 wages, and UBIA all reduced by applicable percentage, then Tier 2 formula applied. Above phase-in range = $0 deduction. |
The W-2 Wage / UBIA Trap for Sole Proprietors
Above the threshold, your QBI deduction is capped by the greater of:
- (A) 50% × W-2 wages paid by the business, OR
- (B) 25% × W-2 wages + 2.5% × UBIA (unadjusted basis of qualified property)
Critical implication: A Schedule C filer with no employees and no depreciable property has W-2 = $0 and UBIA = $0. Above the phase-in range, their QBI deduction is $0 — even on $300,000 of qualified business income.
This is one of the strongest arguments for S-Corp election at higher income levels. The W-2 wages you pay yourself count toward the limitation and can unlock the deduction. See the S-Corp salary optimization section below.
S-Corp Salary Optimization: The 28.6% Rule
For S-Corp shareholders above the QBI threshold, there's a mathematical sweet spot. If the 50% W-2 test is binding:
Optimal salary = 2/7 × Net S-Corp Profit ≈ 28.6%
At this level, both limits equalize and the deduction is maximized at ~14.3% of net profit.
Worked Example: $280K S-Corp
| Salary Level | QBI | 20% × QBI | 50% × W-2 | Deduction |
|---|---|---|---|---|
| $60,000 (too low) | $220,000 | $44,000 | $30,000 | $30,000 (W-2 binds) |
| $80,000 (optimal) | $200,000 | $40,000 | $40,000 | $40,000 |
| $120,000 (too high) | $160,000 | $32,000 | $60,000 | $32,000 (QBI binds) |
Caveat: This is the QBI-optimal salary, not necessarily the overall tax-optimal salary. Reasonable compensation rules (IRC §1366(e), §7436) still apply — you cannot set salary artificially low. FICA savings and state tax interactions may shift the overall optimal point.
QBI Loss Carryforward: The Headwind Nobody Talks About
Under IRC §199A(c)(2), if a qualified business has a net loss, that loss:
- Offsets QBI from other businesses in the current year
- Carries forward to reduce QBI in subsequent years (dollar-for-dollar)
- Cannot be carried back
This is a headwind, not an asset. The carryforward loss blocks your future §199A deduction until you earn enough pass-through income to overcome it. If you had a $100,000 QBI loss last year, you need $100,000 of positive QBI just to break even before the 20% deduction kicks in again.
Years to recover depends on your current annual pass-through income level. At $50,000/year positive QBI, a $100,000 carryforward takes 2 years to clear.
Frequently Asked Questions
What is the QBI deduction for 2025?
The QBI deduction for 2025 is 20% of qualified business income under IRC §199A. It applies to pass-through business owners (sole proprietors, S-Corp shareholders, partners). The deduction is capped at the lesser of 20% of QBI or 20% of taxable income. For 2026+, the OBBBA increased the rate to 23% and made it permanent.
What are the QBI income thresholds for 2025?
For 2025, the QBI deduction phase-in thresholds are: MFJ $394,600 (phase-in ends at $494,600), Single/HOH $197,300 (phase-in ends at $247,300). Below these thresholds, the deduction is straightforward — 20% of QBI with no W-2 wage or UBIA limitations.
Can a sole proprietor with no employees get the QBI deduction above the threshold?
Generally no. Above the phase-in range, the QBI deduction is limited by the W-2 wage/UBIA test. A sole proprietor with no employees has $0 W-2 wages and typically $0 UBIA, resulting in a $0 deduction. This is one of the strongest arguments for S-Corp election at higher income levels.
What is the optimal S-Corp salary for maximizing the QBI deduction?
The QBI-optimal salary is approximately 28.6% of net S-Corp profit (2/7 of net profit). At this level, the 50% W-2 wage test and the 20% QBI limit equalize, maximizing the deduction at about 14.3% of net profit. However, reasonable compensation rules still apply.
Are SSTB businesses still restricted for QBI in 2026?
No. The OBBBA removed SSTB limitations starting in 2026. Beginning that year, specified service trades or businesses (health, law, accounting, consulting, financial services, etc.) are treated the same as non-SSTB businesses for QBI purposes at all income levels.
What is a QBI loss carryforward?
Under IRC §199A(c)(2), if your qualified business has a net loss, that loss carries forward and reduces your QBI in future years dollar-for-dollar. This is a headwind — it blocks your §199A deduction until you earn enough positive QBI to overcome the prior loss. There is no carryback.