What the deduction is
The deduction, also called the Section 199A deduction, has been available since tax years beginning after 31 December 2017. The IRS describes its main part as 20% of QBI from a domestic business run as a sole proprietorship or through a partnership, S corporation, trust or estate. It can be claimed whether you itemize or take the standard deduction.
It is a deduction in figuring taxable income, not a business expense. It does not reduce self-employment tax, and it does not reduce the business's own profit. Its overall size is capped at 20% of your taxable income minus net capital gain.
- Eligible: profit from a sole proprietorship, a single-member LLC, a partnership share, or an S corporation share
- Not eligible: income earned through a C corporation
- Not eligible: income from providing services as an employee, including an S corporation owner's W-2 salary
What the 2025 law changed
Before 2025 the deduction was scheduled to end after that year. Public Law 119-21, section 70105, rewrote the provision so that it no longer has an end date. The same section widened the phase-in ranges and created a minimum deduction, both for tax years beginning after 31 December 2025.
| Tax year 2025 | Tax year 2026 | |
|---|---|---|
| Threshold, single and most other filers | $197,300 | $201,750 |
| Threshold, married filing separately | $197,300 | $201,775 |
| Threshold, married filing jointly | $394,600 | $403,500 |
| Phase-in range above the threshold | $50,000 ($100,000 joint) | $75,000 ($150,000 joint) |
| Limits fully apply at | $247,300 ($494,600 joint) | $276,750 single; $276,775 separate; $553,500 joint |
| Minimum deduction | None | $400, if you have at least $1,000 of QBI from active businesses in which you materially participate |
The 2026 figures come from Rev. Proc. 2025-32, and the 2025 figures from Rev. Proc. 2024-40. The $400 minimum is indexed after 2026. The 2027 figures have not been published yet.
Below and above the threshold
If your taxable income is below the threshold for your filing status, the calculation is simplest: roughly 20% of QBI, subject to the taxable income cap. Above it, limits phase in. The IRS says those limits can depend on the type of trade or business, the W-2 wages the business pays, and the original cost of qualified property it holds.
The wider 2026 range matters for owners near the line. Under the 2025 rules a single filer's limits were fully in force $50,000 above the threshold; for 2026 that distance is $75,000, so the reduction happens more gradually.
Why S corporation salary is not QBI
This is the interaction that most S corporation savings estimates leave out. A sole proprietor's business profit, after certain adjustments, is QBI. An S corporation owner's profit is split: the salary is wages, and the IRS says income from providing services as an employee is not eligible. Only the profit left after salary counts.
So an S election that reduces self-employment tax also shrinks the QBI deduction. The larger the salary, the smaller the deduction. Any comparison that shows the payroll tax saved without showing the QBI given up is overstating the benefit.
An illustrative example
Illustrative only, below the 2026 threshold, ignoring the other adjustments that apply to real returns. Suppose a business has $100,000 of profit that would all count as QBI.
| Sole proprietor | S corporation paying a $50,000 salary | |
|---|---|---|
| Profit before owner salary | $100,000 | $100,000 |
| Owner's W-2 salary | None | $50,000 |
| QBI, before other adjustments | About $100,000 | About $50,000, less the company's share of payroll taxes |
| QBI deduction at 20% | Up to about $20,000 | Up to about $10,000 |
The S corporation's lower QBI deduction partly offsets its lower Social Security and Medicare cost. Both effects belong in the same comparison, along with payroll and Massachusetts costs.
Massachusetts does not follow it
The QBI deduction is a federal deduction. The Department of Revenue's guidance on the 2025 federal law, TIR 26-4, lists section 70105, the QBI extension and enhancement, as not adopted for Massachusetts personal income tax. Don't assume it lowers your Massachusetts tax, and expect your Form 1 figures to differ from your federal taxable income for that reason, among others.
What to bring to a conversation about it
If you are weighing an S election, the QBI effect is one of several lines that decide the answer. Our page on what an honest S-corp savings comparison must include lists the others, and we can run the comparison with your actual numbers.
- Last year's federal return, including Form 8995 or 8995-A if you filed one
- Year-to-date profit from reconciled books
- Any W-2 wages the business pays, including your own if you have an S corporation
- Your expected taxable income and filing status for the year
- Records of business property, with purchase dates and cost
Figures on this page were checked against the IRS and Massachusetts sources listed alongside on 28 Sep 2026. They change — confirm the current amount before relying on one.
General information for owner-led businesses, not advice for your specific situation. Tax and accounting rules change, and how they apply depends on facts particular to your business. Talk to us — or to another qualified professional — before acting on anything here.
