The QBI Deduction: A Complete Guide for Small Business Owners (IRC 199A)

By Yarik Yarosh, CPA ·September 5, 2026 ·5 min read

Written by Yarik Yarosh, CPA (US & Canada) September 5, 2026 · FL CPA license AC61704 · CPA Ontario

The qualified business income (QBI) deduction under IRC 199A is the most significant tax benefit available to small business owners operating as sole proprietors, S-Corp shareholders, or partners in a partnership. The deduction is up to 20% of qualified business income, which can reduce the effective tax rate on business income by 4-7 percentage points. The OBBBA made the QBI deduction permanent (it was originally made permanent by the One Big Beautiful Bill Act under the TCJA).

✓Key takeaway

The QBI deduction equals 20% of qualified business income (net profit from the business, with certain adjustments), limited by the lesser of: (a) 20% of QBI, or (b) 20% of the taxpayer’s taxable income (before the QBI deduction). Below the income threshold ($191,950 single / $383,900 MFJ for 2025), the deduction is straightforward: 20% of QBI, no further limitations. Above the threshold, two additional rules apply: (1) SSTB rule: If the business is a specified service trade or business (health care, law, accounting, consulting, financial services, performing arts, athletics, brokerage), the QBI deduction phases out completely in the $50,000 range above the threshold (single) or $100,000 range (MFJ). (2) W-2 wages / UBIA limitation: The QBI deduction for non-SSTB businesses is limited to the greater of: (i) 50% of W-2 wages paid by the business, or (ii) 25% of W-2 wages plus 2.5% of UBIA of qualified property. The W-2 wages limitation doesn’t apply below the threshold.

How is QBI calculated?

QBI is the net profit from a qualified trade or business, calculated as: gross income from the business, minus deductions allocable to the business (including the deductible portion of self-employment tax, self-employed health insurance, and retirement plan contributions for sole proprietors). For current guidance, see IRS Publication 535 (Business Expenses). For S-Corp shareholders, QBI is the shareholder’s share of the S-Corp’s ordinary business income (the K-1 Box 1 amount), NOT including the W-2 salary (which is a deduction to the S-Corp, not QBI).

How does the W-2 wages limitation work above the threshold?

Hypothetical example

Round numbers. A construction company S-Corp earns $300,000 in QBI (above the threshold). The owner pays $90,000 in W-2 salary. The company also pays $120,000 in W-2 wages to 3 employees. Total W-2 wages: $210,000. Equipment UBIA: $150,000.

Test 1: 50% of W-2 wages = 50% x $210,000 = $105,000.

Test 2: 25% of W-2 wages + 2.5% of UBIA = (25% x $210,000) + (2.5% x $150,000) = $52,500 + $3,750 = $56,250.

QBI deduction: 20% of $300,000 = $60,000, limited to the greater of Test 1 ($105,000) or Test 2 ($56,250). Test 1 wins: $105,000. The QBI deduction is $60,000 (the lesser of $60,000 and $105,000).

The W-2 wages are more than sufficient to support the full QBI deduction.

What if there were no employees (only subcontractors)? Total W-2 wages: $90,000 (owner only). Test 1: 50% x $90,000 = $45,000. Test 2: (25% x $90,000) + (2.5% x $150,000) = $22,500 + $3,750 = $26,250.

QBI deduction: 20% of $300,000 = $60,000, limited to $45,000 (Test 1). The deduction is reduced by $15,000, costing $3,600 in additional taxes at 24%.

Illustrative numbers only, not a real client and not advice for your facts.

What’s the SSTB phase-out?

For SSTB businesses above the threshold, the QBI deduction phases out over a $75,000 range (single) or $150,000 range (MFJ), widened by the OBBBA. At the top of the phase-out range ($266,950 single / $533,900 MFJ), the QBI deduction is $0 for SSTB businesses.

Within the phase-out range, the applicable percentage is calculated, and only that percentage of QBI, W-2 wages, and UBIA is used in the QBI deduction formula. This makes the marginal tax rate within the phase-out range very high (because each additional dollar of income reduces both the income tax bracket benefit AND the QBI deduction).

Related guides:

How do specified service trades or businesses affect your QBI deduction?

Specified service trades or businesses (SSTBs) including law, medicine, accounting, consulting, financial services, and performing arts face a phase-out of the QBI deduction at higher income levels. For 2025, the QBI deduction phases out for SSTBs between $191,950 and $241,950 for single filers and $383,900 and $483,900 for joint filers, with zero deduction above the upper threshold. Non-SSTB businesses above the income threshold are limited to the greater of 50% of W-2 wages or 25% of W-2 wages plus 2.5% of the unadjusted basis of qualified property, but they never lose the deduction entirely. The SSTB classification looks at the principal asset of the business, so if more than 10% of gross receipts come from specified service activities (5% for businesses with over $25 million in gross receipts), the entire business is treated as an SSTB.

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Cite this page

Yarik Yarosh, CPA. "The QBI Deduction: A Complete Guide for Small Business Owners (IRC 199A)." Blue Cloud CPA, September 5, 2026. https://bluecloudcpa.com/guides/small-business-qbi-deduction-complete-guide

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.