The qualified business income deduction has been part of pass-through planning since tax years beginning after December 31, 2017. The 2025 legislation, Public Law 119-21, changed it for tax years beginning after 2025. For firms that built their pass-through workflows around the original calculation, the changes belong in the 2026 planning checklist, the engagement letters and the client estimate conversations.
What the deduction is
The IRS describes the QBI deduction, also called the section 199A deduction, as available whether or not the taxpayer itemizes. It has two components:
- QBI component: 20 percent of qualified business income from a domestic sole proprietorship, partnership, S corporation, trust or estate. Agricultural and horticultural cooperative patrons may face a reduction.
- REIT and PTP component: 20 percent of qualified REIT dividends and qualified publicly traded partnership income.
The IRS states that income earned through a C corporation, and income from providing services as an employee, is not eligible. Wage income, capital gains or losses and guaranteed payments from a partnership are also excluded from QBI. Rental real estate may qualify under a safe harbor in Revenue Procedure 2019-38 or as a section 162 trade or business.
The limits
The deduction is limited to the lesser of the combined components or 20 percent of taxable income minus net capital gain. The QBI component is also subject to limits tied to taxable income, the type of business, W-2 wages paid and the unadjusted basis immediately after acquisition of qualified property. Forms 8995 and 8995-A and their instructions set out the thresholds, the specified service trade or business rules and the computations for the tax year in question. Take the figures from the form instructions for the year being prepared, not from prior-year files.
What changed for 2026
The IRS page on the deduction states two changes for tax years beginning after 2025:
- Greater-of calculation. The deduction is the greater of the taxable income limitation amount or the Minimum Deduction for Active Qualified Business Income, referred to as the MDA-QBI.
- Active trade or business. For the minimum deduction, an active qualified trade or business is one in which the taxpayer materially participates under section 469(h). The taxpayer needs to meet only one of the material participation tests in Treasury Regulation 1.469-5T(a)(1) through (7).
Section 70105 of Public Law 119-21 rewrote section 199A(i). For tax years beginning after 2025, the deduction for an applicable taxpayer equals the greater of the amount computed without regard to the new subsection or $400. An applicable taxpayer is one whose aggregate qualified business income from all active qualified trades or businesses is at least $1,000. For tax years beginning after 2026, both the $400 and the $1,000 are indexed for inflation, rounded to the nearest multiple of $5. The same section replaced the old sunset language in subsection (i) and increased the taxable income phase-in ranges in section 199A(b)(3)(B) and (d)(3) from $50,000 ($100,000 on a joint return) to $75,000 ($150,000 on a joint return), effective for tax years beginning after 2025. Those amounts come from the enacted statute text, not from the IRS summary page, which describes the structure of the minimum deduction and the material participation standard and sends readers to the Form 8995 and 8995-A instructions for the computation.
The IRS page also states that tip income under section 224 that is excluded from the business's net profit is not QBI for tax years 2025 through 2028.
Where the deduction interacts with other decisions
S corporation wages
For an S corporation owner, W-2 wages reduce QBI but count toward the wage limit. A higher salary lowers QBI and raises payroll tax. A lower salary does the reverse and invites reclassification risk. The wage decision should be made under the reasonable compensation standard first. See S corporation reasonable compensation.
Depreciation and the property limit
Bonus depreciation and section 179 expensing reduce QBI in the year taken, while the unadjusted basis of qualified property for the limit is measured at acquisition. Deductions that reduce QBI should be modeled alongside the credit. See section 179 and bonus depreciation after the 2025 legislation.
Entity choice
A C corporation does not generate QBI. A conversion decision for a profitable pass-through should account for the deduction. See S corporation vs LLC: choosing an entity.
Estimated tax
The deduction lowers taxable income and therefore the estimated tax required. A projection that omits it overpays. See estimated tax payments.
Workflow for 2026 preparation
- Identify each trade or business. QBI is computed per business. Aggregation elections, where available, are made on the return and need to be consistent.
- Test material participation. Record which of the regulation's tests the owner meets, for each business, in the file. The new minimum deduction depends on it.
- Collect the inputs. W-2 wages paid by the business, the unadjusted basis of qualified property, qualified REIT dividends and PTP income.
- Identify specified service businesses. The classification matters at higher taxable income. Document the facts behind the classification.
- Carry forward losses. Prior-year QBI losses carry forward and reduce current QBI.
- Select the form. Use the instructions for Form 8995 or 8995-A to determine which applies.
FAQ
Do employees get the deduction?
No. The IRS states that income from providing services as an employee is not eligible.
Do guaranteed payments from a partnership count?
No. The IRS excludes them from QBI.
Is the minimum deduction automatic?
It depends on the taxpayer having qualified business income from a trade or business in which the taxpayer materially participates. The calculation is the greater of the two amounts.
CORAA prepares ready-to-review audit files for US CPA firms; see /us.
Sources
- IRS, Qualified business income deduction: https://www.irs.gov/newsroom/qualified-business-income-deduction
- IRS, One Big Beautiful Bill provisions: https://www.irs.gov/newsroom/one-big-beautiful-bill-provisions
- Public Law 119-21, section 70105 (statute text, GovInfo): https://www.govinfo.gov/content/pkg/PLAW-119publ21/html/PLAW-119publ21.htm
Part of CORAA University · Tax and compliance for CPA firms: related guides, calculators and templates.
AU-C references are to AICPA Professional Standards, paraphrased here; read the standard itself before relying on a requirement. This page is guidance, not professional advice. Report an error