QBI Deduction (§199A)

The Qualified Business Income (QBI) deduction under IRC §199A lets eligible pass-through owners — sole proprietors, partners, S-corporation shareholders, and certain REIT/PTP investors — deduct up to 20% of their qualified business income from federal taxable income.

The OBBBA changes everything (and nothing). §199A was scheduled to sunset at the end of 2025 under the TCJA. OBBBA §70105 made §199A permanent. The same section also added new IRC §199A(i), creating a minimum $400 deduction for taxpayers with at least $1,000 of QBI — a floor that protects very small businesses from being shut out by the wage/W-2/UBIA limitation. The $400 and $1,000 figures index for inflation after 2026.

2026 thresholds (Rev. Proc. 2025-32 §4.26).

• Single / Head of Household / MFS: $201,750 (taxable income before the deduction)
• Married Filing Jointly: $403,500
• The OBBBA also widened the phase-in range to $75,000 single / $150,000 MFJ above those thresholds.

Below the threshold, the calculation is straightforward: 20% of QBI, capped at 20% of (taxable income − net capital gains). Above the threshold, the wage/UBIA limits and the SSTB carve-out kick in.

The SSTB carve-out. Specified Service Trades or Businesses — health, law, accounting, actuarial, performing arts, consulting, athletics, financial services, brokerage, and any trade where the principal asset is the reputation or skill of the owner — lose the QBI deduction once income clears the phase-in. Critically for ELM readers: rideshare driving, delivery, freelance design, engineering, real estate (rental as a §162 trade), and most gig work are not SSTBs.

Worked example. Olivia is a freelance graphic designer, single filer. She nets $80,000 on Schedule C in 2026 after the half-SE-tax deduction. Her taxable income (after standard deduction) is well below the $201,750 threshold.

• QBI = $80,000 (Schedule C net minus the §164(f) half-SE-tax deduction)
• 20% × $80,000 = $16,000 QBI deduction

That $16,000 comes off line 13 of Form 1040 — after AGI, so it reduces income tax but not SE tax. Olivia’s effective marginal rate of 22% turns this into $3,520 in tax savings.