Qualified Business Income Deduction

There's a deduction that can wipe out up to 20% of your business income. But if you're above certain income levels, it can vanish unless your business type and W-2 wages are structured correctly.

Key numbers

What QBI is

The Qualified Business Income Deduction lets pass-through business owners deduct up to 20% of their qualified business income from their federal taxable income. The deduction is available to sole proprietors and S-Corps, but the rules for claiming it get more complicated as income rises. Your income level and business type are crucial to understanding your deduction amount.

For 2026, the full 20% deduction is available below $201,750 (single) or $403,500 (MFJ). Above that, the deduction begins to phase out and is completely gone at $276,750 (single) or $553,500 (MFJ). What happens in that phaseout range, and above it, depends on your business type.

SSTB vs non-SSTB

The tax code splits businesses into two categories:

• Specified service trades or businesses (SSTBs) include law, accounting, medicine, consulting, and financial services.
• Non-specified service trades or businesses (non-SSTBs) include product businesses, tech, real estate, engineering, and manufacturing.

For SSTBs, the deduction disappears entirely above the phaseout. There is no way to preserve it. For non-SSTBs, you can still claim a deduction above the phaseout, but it's no longer a simple 20% of income. Instead, it's capped at the lesser of 20% of QBI or 50% of the W-2 wages your business pays.

Why your W-2 wages matter

That 50% wage cap is where the S-Corp election becomes important again. A sole proprietor above the phaseout with no employees has zero W-2 wages, which means a zero QBI deduction regardless of how much business income they earn. An S-Corp creates W-2 wages through the owner's salary, and those wages count toward the cap.

If you run a non-SSTB and earn well above the phaseout, your deduction is governed by the 50% wage cap. At a $150,000 salary, 50% of wages is $75,000, which becomes your QBI deduction. Setting a higher salary raises the cap and increases the deduction. The tradeoff is more payroll taxes for a bigger income tax deduction. The key is finding the salary where 20% of QBI and 50% of W-2 wages meet, given your other deductions.

A note for California residents: The QBI deduction is a federal deduction only. California does not conform to QBI, so this deduction reduces your federal tax bill but has no effect on your California income taxes. When modeling the savings, use your federal marginal rate — not your combined rate.