Business Tax Preparation · Business expenses, deductions and credits

Qualified business income

Verification 2026 Verified
tax year · reviewed 2026-08-21 · Draft for I. Ohu review

Three things about this deduction changed in July 2025, and the first of them is that it did not expire. A reader working from material written before then will believe the section stopped applying after 2025, will use a phase-in range a third narrower than the real one, and will not know that a small active business now has a floor beneath its deduction.

The rule

The deduction. the lesser of the combined qualified business income amount or 20 percent of the excess of taxable income over net capital gain — subject to the IRC § 199A(i) minimum^TY2026 (IRC § 199A(a)), where the first limb is the sum of the amounts determined for each qualified trade or business, plus 20 percent of the aggregate qualified REIT dividends and qualified publicly traded partnership income^TY2026 (IRC § 199A(b)(1)).

Per business. the lesser of 20 percent of the qualified business income of the trade or business, or the greater of 50 percent of its W-2 wages, or 25 percent of those wages plus 2.5 percent of the unadjusted basis immediately after acquisition of all qualified property^TY2026 (IRC § 199A(b)(2)).

Unless income is low enough. where taxable income does not exceed the threshold amount, the wage and property limitation is disregarded entirely and the deduction is simply 20 percent of qualified business income^TY2026 (IRC § 199A(b)(3)(A)). The threshold is $403,500 on a joint return, $201,775 for a married individual filing separately, and $201,750 in any other case — the IRC § 199A(e)(2) threshold amounts for taxable years beginning in 2026^TY2026 (Rev. Proc. 2025-32 § 3.26), and the limitation phases in fully by $553,500 on a joint return, $276,775 for a married individual filing separately, and $276,750 in any other case — the top of the IRC § 199A(b)(3)(B) and § 199A(d)(3)(A) phase-in range for taxable years beginning in 2026^TY2026.

Specified service businesses. a trade or business described in IRC § 1202(e)(3)(A), read without the words "engineering, architecture," and with "employees or owners" substituted for "employees", or one involving investing and investment management, trading, or dealing in securities, partnership interests or commodities^TY2026 (IRC § 199A(d)(2)). Below the threshold they are treated like any other business; above the phase-in range they are excluded entirely.

Qualified property. tangible property subject to the allowance for depreciation under IRC § 167 which is held by and available for use in the business at the close of the year, is used at any point during the year in producing qualified business income, and whose depreciable period has not ended before the close of the year^TY2026 (IRC § 199A(b)(6)(A)).

The floor. $400 — for a taxpayer whose aggregate qualified business income from all active qualified trades or businesses is at least $1,000, the deduction is the greater of the ordinary computation or this amount; both figures are indexed from a 2025 base for taxable years beginning after 2026^TY2026 (IRC § 199A(i)), where an active business means a qualified trade or business in which the taxpayer materially participates within the meaning of IRC § 469(h)^TY2026 (IRC § 199A(i)(2)(B)).

Current figures

Item	Rule	Authority
The deduction	the lesser of the combined qualified business income amount or 20 percent of the excess of taxable income over net capital gain — subject to the IRC § 199A(i) minimum^TY2026	IRC § 199A(a)
Combined amount	the sum of the amounts determined for each qualified trade or business, plus 20 percent of the aggregate qualified REIT dividends and qualified publicly traded partnership income^TY2026	IRC § 199A(b)(1)
Per trade or business	the lesser of 20 percent of the qualified business income of the trade or business, or the greater of 50 percent of its W-2 wages, or 25 percent of those wages plus 2.5 percent of the unadjusted basis immediately after acquisition of all qualified property^TY2026	IRC § 199A(b)(2)
Below the threshold	where taxable income does not exceed the threshold amount, the wage and property limitation is disregarded entirely and the deduction is simply 20 percent of qualified business income^TY2026	IRC § 199A(b)(3)(A)
Threshold, 2026	$403,500 on a joint return, $201,775 for a married individual filing separately, and $201,750 in any other case — the IRC § 199A(e)(2) threshold amounts for taxable years beginning in 2026^TY2026	Rev. Proc. 2025-32 § 3.26
Top of the phase-in range, 2026	$553,500 on a joint return, $276,775 for a married individual filing separately, and $276,750 in any other case — the top of the IRC § 199A(b)(3)(B) and § 199A(d)(3)(A) phase-in range for taxable years beginning in 2026^TY2026	Rev. Proc. 2025-32 § 3.26
The range, widened	the phase-in range was widened from $50,000, or $100,000 on a joint return, to $75,000 and $150,000 by Pub. L. 119-21 § 70105(a), in both IRC § 199A(b)(3)(B) and § 199A(d)(3)^TY2026	Pub. L. 119-21 § 70105(a)
Specified service trade or business	a trade or business described in IRC § 1202(e)(3)(A), read without the words "engineering, architecture," and with "employees or owners" substituted for "employees", or one involving investing and investment management, trading, or dealing in securities, partnership interests or commodities^TY2026	IRC § 199A(d)(2)
Qualified property	tangible property subject to the allowance for depreciation under IRC § 167 which is held by and available for use in the business at the close of the year, is used at any point during the year in producing qualified business income, and whose depreciable period has not ended before the close of the year^TY2026	IRC § 199A(b)(6)(A)
Now permanent	permanent — Pub. L. 119-21 § 70105(b)(1) amended IRC § 199A(i) generally, replacing the sentence "This section shall not apply to taxable years beginning after December 31, 2025" with the minimum deduction rule^TY2026	Pub. L. 119-21 § 70105(b)(1)
Minimum deduction	$400 — for a taxpayer whose aggregate qualified business income from all active qualified trades or businesses is at least $1,000, the deduction is the greater of the ordinary computation or this amount; both figures are indexed from a 2025 base for taxable years beginning after 2026^TY2026	IRC § 199A(i)
Active business	a qualified trade or business in which the taxpayer materially participates within the meaning of IRC § 469(h)^TY2026	IRC § 199A(i)(2)(B)

How it works in practice

Work from taxable income, and ask which of three bands the taxpayer is in. Below the threshold, where taxable income does not exceed the threshold amount, the wage and property limitation is disregarded entirely and the deduction is simply 20 percent of qualified business income^TY2026 (IRC § 199A(b)(3)(A)) — no wage test, no property test, and a specified service business is treated like any other. Above the top of the phase-in range, the wage and property limitation applies in full and a specified service business gets nothing at all. Between the two, both effects phase in ratably.

The threshold is measured on taxable income, not on business income. IRC § 199A(e)(2) defines the threshold amount by reference to the taxpayer’s taxable income computed without the section’s own deduction. So a taxpayer with modest business profits but large investment income can be above the threshold, and one with a large business and large deductions elsewhere can be below it.

Above the range, the limitation is the greater of two figures, not the lesser. the lesser of 20 percent of the qualified business income of the trade or business, or the greater of 50 percent of its W-2 wages, or 25 percent of those wages plus 2.5 percent of the unadjusted basis immediately after acquisition of all qualified property^TY2026 (IRC § 199A(b)(2)). The wage-only test and the wage-plus-property test are alternatives, and the taxpayer takes whichever is larger. That is why a capital-intensive business with few employees can still get a deduction: the second test brings in a share of the unadjusted basis of qualified property.

“Unadjusted basis immediately after acquisition” means before depreciation. tangible property subject to the allowance for depreciation under IRC § 167 which is held by and available for use in the business at the close of the year, is used at any point during the year in producing qualified business income, and whose depreciable period has not ended before the close of the year^TY2026 (IRC § 199A(b)(6)(A)) requires the property still to be held and available for use at the close of the year, to have been used during the year in producing qualified business income, and to be inside its depreciable period. But the figure taken into account is the original cost, undiminished by depreciation — including where the cost was expensed in full under IRC § 179 or through bonus depreciation.

A specified service business is defined by cross-reference, and the cross-reference has a carve-out. a trade or business described in IRC § 1202(e)(3)(A), read without the words "engineering, architecture," and with "employees or owners" substituted for "employees", or one involving investing and investment management, trading, or dealing in securities, partnership interests or commodities^TY2026 (IRC § 199A(d)(2)). The list in IRC § 1202(e)(3)(A) covers health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services and brokerage services, plus any business whose principal asset is the reputation or skill of one or more of its employees or owners — and IRC § 199A(d)(2)(A) applies it “without regard to the words ‘engineering, architecture,’”. Engineers and architects are therefore not specified service businesses, which is the single most useful thing to know about the list.

Below the threshold, none of that matters. A doctor with taxable income under the threshold gets the full deduction. The specified service exclusion is not a disqualification from the section; it is a rule that operates only as income rises.

And now there is a floor. $400 — for a taxpayer whose aggregate qualified business income from all active qualified trades or businesses is at least $1,000, the deduction is the greater of the ordinary computation or this amount; both figures are indexed from a 2025 base for taxable years beginning after 2026^TY2026 (IRC § 199A(i)). It reaches a taxpayer whose aggregate qualified business income from active businesses clears a small floor, and it gives the greater of the ordinary computation or a fixed amount. a qualified trade or business in which the taxpayer materially participates within the meaning of IRC § 469(h)^TY2026 (IRC § 199A(i)(2)(B)) — material participation, so a passive investor in a business does not qualify. Both figures are indexed for taxable years beginning after 2026.

Three consultants, three answers

Three unmarried consultants each have $300,000 of qualified business income from a consulting practice, which is a specified service trade or business. Each pays $60,000 of W-2 wages and holds no qualified property. They differ only in taxable income.

Taxable income of $180,000. Below $403,500 on a joint return, $201,775 for a married individual filing separately, and $201,750 in any other case — the IRC § 199A(e)(2) threshold amounts for taxable years beginning in 2026^TY2026. where taxable income does not exceed the threshold amount, the wage and property limitation is disregarded entirely and the deduction is simply 20 percent of qualified business income^TY2026 (IRC § 199A(b)(3)(A)) — the wage limitation is disregarded and the specified service status is irrelevant. The deduction is 20 percent of $300,000, capped by 20 percent of taxable income less net capital gain — $36,000.

Taxable income of $320,000. Above the top of the phase-in range for a single filer. The practice is a specified service trade or business and is excluded entirely: no qualified business income, no deduction.

Taxable income of $230,000. Inside the range. The applicable percentage of the qualified business income is taken into account, reducing ratably as income rises through the range, and the wage limitation phases in over the same span. Neither effect is all-or-nothing.

The middle band did not exist in this width until 2025. the phase-in range was widened from $50,000, or $100,000 on a joint return, to $75,000 and $150,000 by Pub. L. 119-21 § 70105(a), in both IRC § 199A(b)(3)(B) and § 199A(d)(3)^TY2026 — before then the third consultant would have been excluded entirely at $230,000 of taxable income.

The property-rich business with two employees

A haulage business has $900,000 of qualified business income, pays $140,000 of W-2 wages, and owns tractors and trailers with an unadjusted basis immediately after acquisition of $6,400,000, all within their depreciable periods. The owner’s taxable income is well above the top of the phase-in range.

the lesser of 20 percent of the qualified business income of the trade or business, or the greater of 50 percent of its W-2 wages, or 25 percent of those wages plus 2.5 percent of the unadjusted basis immediately after acquisition of all qualified property^TY2026 (IRC § 199A(b)(2)) gives 20 percent of $900,000, or $180,000, capped by the greater of two figures.

The wage-only test gives 50 percent of $140,000 — $70,000.

The wage-and-property test gives 25 percent of $140,000 plus 2.5 percent of $6,400,000 — $35,000 plus $160,000, or $195,000.

The greater is $195,000, which exceeds the $180,000, so the limitation does not bite and the deduction is $180,000.

Note two things. The property figure is the unadjusted basis, so it is unaffected by the depreciation the business has taken — including bonus depreciation that wrote the whole cost off in year one. And had the business only had the wage test available, it would have lost $110,000 of deduction. The second alternative exists for exactly this kind of business.

The side business that now gets something

A salaried employee runs a small repair business at weekends in which she materially participates. It produces $3,200 of qualified business income. Her taxable income, mostly salary, is $140,000.

Under the ordinary computation the deduction is 20 percent of $3,200, or $640 — below the threshold, so no wage or property test applies.

$400 — for a taxpayer whose aggregate qualified business income from all active qualified trades or businesses is at least $1,000, the deduction is the greater of the ordinary computation or this amount; both figures are indexed from a 2025 base for taxable years beginning after 2026^TY2026 (IRC § 199A(i)) gives the greater of that and the fixed minimum. Here the ordinary computation wins, so the floor does nothing.

Change the facts: suppose the business produced $1,400 of qualified business income. The ordinary computation gives $280. The floor applies because the aggregate active qualified business income clears the $1,000 mark, and the deduction becomes the fixed amount instead — more than double.

Change them again: make her a passive investor in the business rather than a participant. a qualified trade or business in which the taxpayer materially participates within the meaning of IRC § 469(h)^TY2026 (IRC § 199A(i)(2)(B)) requires material participation within IRC § 469(h), so the floor is unavailable and the deduction returns to $280.

Traps.

The section did not expire. {fig:qbi.permanent}. Its former subsection (i) read "This section shall not apply to taxable years beginning after December 31, 2025," and Pub. L. 119-21 § 70105(b)(1) replaced that sentence entirely.

The wage and property tests are alternatives, and the taxpayer takes the greater. {fig:qbi.per_business} (IRC § 199A(b)(2)(B)). An answer that applies only the wage test is incomplete.

Unadjusted basis is before depreciation. {fig:qbi.qualified_property}. Property fully expensed under IRC § 179 still counts at its original cost while its depreciable period runs.

Engineering and architecture are not specified service businesses. {fig:qbi.sstb} (IRC § 199A(d)(2)(A)) applies IRC § 1202(e)(3)(A) "without regard to the words 'engineering, architecture,'".

Specified service status is irrelevant below the threshold. {fig:qbi.below_threshold} (IRC § 199A(b)(3)(A)). A doctor under the threshold gets the full deduction.

The threshold is taxable income, not business income. IRC § 199A(e)(2). Large investment income can push a small business owner above it.

How this has changed

Three changes in one section of one Act, and all three take effect for 2026. Pub. L. 119-21 § 70105 did the following.

It made the deduction permanent. permanent — Pub. L. 119-21 § 70105(b)(1) amended IRC § 199A(i) generally, replacing the sentence "This section shall not apply to taxable years beginning after December 31, 2025" with the minimum deduction rule^TY2026. IRC § 199A(i) previously consisted of a single sentence terminating the section after 2025. Section 70105(b)(1) amended that subsection generally, and § 70105(b)(2) inserted “except as provided in subsection (i),” into IRC § 199A(a) so that the new subsection could operate as a floor rather than a termination. The termination is gone; there is no successor date.

It widened the phase-in range by half. the phase-in range was widened from $50,000, or $100,000 on a joint return, to $75,000 and $150,000 by Pub. L. 119-21 § 70105(a), in both IRC § 199A(b)(3)(B) and § 199A(d)(3)^TY2026. Section 70105(a)(1) made the substitution in IRC § 199A(b)(3)(B), which governs the wage and property limitation, and § 70105(a)(2) made it in IRC § 199A(d)(3), which governs the specified service exclusion. Both ranges widened together, so a specified service business now keeps some deduction over a span half as long again as before. For 2026 the range runs from $403,500 on a joint return, $201,775 for a married individual filing separately, and $201,750 in any other case — the IRC § 199A(e)(2) threshold amounts for taxable years beginning in 2026^TY2026 to $553,500 on a joint return, $276,775 for a married individual filing separately, and $276,750 in any other case — the top of the IRC § 199A(b)(3)(B) and § 199A(d)(3)(A) phase-in range for taxable years beginning in 2026^TY2026.

It added a minimum deduction. $400 — for a taxpayer whose aggregate qualified business income from all active qualified trades or businesses is at least $1,000, the deduction is the greater of the ordinary computation or this amount; both figures are indexed from a 2025 base for taxable years beginning after 2026^TY2026 (IRC § 199A(i)). This is new law with no predecessor, and it is directed at the smallest businesses — the ordinary computation beats it once qualified business income passes a modest level. IRC § 199A(i)(3) indexes both of its figures from a 2025 base for taxable years beginning after 2026, so 2026 is the only year in which they are the statutory amounts.

A fourth change, from a different section, is easy to miss. Pub. L. 119-21 § 70111(b) inserted references to IRC § 68 into IRC § 199A(e)(1) and IRC § 199A(g)(2)(B), so that taxable income for those purposes is computed without regard to the overall limitation on itemized deductions. That conforming amendment was needed because the same Act rewrote IRC § 68 and brought it back into operation for taxable years beginning after 2025 — so the two provisions became live in the same year and had to be told about each other.

Exam focus

Place the taxpayer in one of three bands first: below the threshold, inside the range, or above it. Almost every question turns on which, and the facts always supply taxable income.

Below the threshold, the computation is simple and specified service status is irrelevant. Above the range, apply the wage and property limitation and exclude a specified service business entirely. Inside, both phase in.

Learn the wage and property test as “the greater of,” and learn that qualified property is counted at unadjusted basis.

For 2026 specifically, know the three changes: permanence, the wider range, and the new minimum deduction for an active business. Material written before July 2025 is wrong on all three.

Check yourself

1. An unmarried architect has $400,000 of qualified business income and taxable income of $600,000, pays $90,000 of W-2 wages and holds no qualified property. Is she excluded as a specified service business?

Answer: No. a trade or business described in IRC § 1202(e)(3)(A), read without the words "engineering, architecture," and with "employees or owners" substituted for "employees", or one involving investing and investment management, trading, or dealing in securities, partnership interests or commodities^TY2026 (IRC § 199A(d)(2)(A)) applies IRC § 1202(e)(3)(A) without regard to the words “engineering, architecture,” so architecture is not a specified service trade or business. She is above the range, so the wage limitation applies in full: her deduction is limited to 50 percent of $90,000, or $45,000, against 20 percent of $400,000.

2. A business has $500,000 of qualified business income, pays no wages, and holds qualified property with an unadjusted basis of $3,000,000. The owner is above the range. What is the limitation?

Answer: $75,000. the lesser of 20 percent of the qualified business income of the trade or business, or the greater of 50 percent of its W-2 wages, or 25 percent of those wages plus 2.5 percent of the unadjusted basis immediately after acquisition of all qualified property^TY2026 (IRC § 199A(b)(2)(B)) takes the greater of 50 percent of W-2 wages — nil — and 25 percent of wages plus 2.5 percent of unadjusted basis, which is nil plus $75,000. The deduction is the lesser of that and 20 percent of $500,000, so $75,000.

3. A dentist has taxable income below the threshold amount. Does the specified service exclusion reduce his deduction?

Answer: No. where taxable income does not exceed the threshold amount, the wage and property limitation is disregarded entirely and the deduction is simply 20 percent of qualified business income^TY2026 (IRC § 199A(b)(3)(A)) and IRC § 199A(d)(3) both operate only above the threshold. Below it he is treated like any other business and takes 20 percent of qualified business income, subject to the overall taxable income cap in IRC § 199A(a)(2).

4. Does IRC § 199A apply to a taxable year beginning in 2026?

Answer: Yes. permanent — Pub. L. 119-21 § 70105(b)(1) amended IRC § 199A(i) generally, replacing the sentence "This section shall not apply to taxable years beginning after December 31, 2025" with the minimum deduction rule^TY2026 — the former IRC § 199A(i), which terminated the section after 2025, was replaced in its entirety by Pub. L. 119-21 § 70105(b)(1), and the new subsection (i) is a minimum deduction rule rather than a termination.

5. A taxpayer materially participates in one business producing $1,500 of qualified business income and has no other business. What is her deduction?

Answer: The fixed minimum under $400 — for a taxpayer whose aggregate qualified business income from all active qualified trades or businesses is at least $1,000, the deduction is the greater of the ordinary computation or this amount; both figures are indexed from a 2025 base for taxable years beginning after 2026^TY2026 (IRC § 199A(i)), because it exceeds the ordinary computation of 20 percent of $1,500, or $300, and her aggregate active qualified business income clears the floor. a qualified trade or business in which the taxpayer materially participates within the meaning of IRC § 469(h)^TY2026 is satisfied by her material participation.

Change log

2026-08-21Initial draft. Sets out the IRC § 199A(a) computation and the IRC § 199A(b)(2) wage and property limitation with the IRC § 199A(b)(3) threshold and phase-in, the IRC § 199A(d)(2) definition of a specified service trade or business, and the IRC § 199A(b)(6) definition of qualified property. Records three changes made by Pub. L. 119-21 § 70105: the deduction is permanent, the phase-in range widened from $50,000 and $100,000 to $75,000 and $150,000, and a new IRC § 199A(i) gives a minimum deduction to a taxpayer with active qualified business income above a floor.