Educational information, not individual financial advice.
Key Takeaways
Section 199A — the Qualified Business Income (QBI) deduction — is a 20% deduction on income from sole proprietorships, partnerships, S-corps, and certain rental real estate. Enacted in 2018 to give pass-through businesses a tax break similar to the C-corp rate cut, it's one of the largest deductions available to self-employed taxpayers. It's also one of the most rule-heavy.
If your taxable income is under the threshold and you have qualified business income, the deduction is straightforward:
QBI deduction = 20% × (lesser of QBI or taxable income before QBI deduction)
So a sole proprietor with $80,000 of net QBI and $90,000 of taxable income gets a $16,000 deduction (20% × $80,000). That comes off taxable income, not AGI — it's a "below the line" deduction that's available whether you itemize or take the standard.
The income threshold (2026):
Below these, the rules are simple. Above, things get complicated.
Once your taxable income exceeds the threshold, the deduction is capped at the greater of:
For a sole proprietor with no employees and no business property, both caps are $0 — so the deduction phases out entirely above the threshold. Solo professionals get the full deduction below threshold and nothing above.
For a business with employees + property:
The W-2 / UBIA caps create an explicit incentive to hire employees or own depreciable real estate inside the business — the deduction rewards labor and capital.
This is where the cliff kicks in. SSTBs are businesses where "the principal asset is the reputation or skill of one or more employees." The IRS lists them explicitly:
For SSTB filers, the deduction phases out completely between the threshold and threshold + $50,000 (single) / $100,000 (MFJ). Above the upper bound, zero QBI deduction even if you have $100k+ of qualifying income.
Example: a single CFP with $290,000 of taxable income (all from her practice). She's $48,050 over the $241,950 threshold and $1,950 below the $50,000 phase-out range. Her deduction is reduced proportionally — roughly 4% of normal. Above $291,950, the deduction is zero.
Engineering and architecture were specifically carved out — those professionals get the regular 20% deduction with the W-2/UBIA cap, not the SSTB cliff. Lawyers and doctors lobbied for the same carve-out and lost.
The 2025 OBBB added a small floor: anyone with at least $1,000 of qualified business income gets a $400 minimum deduction, even if all the W-2/UBIA caps would otherwise zero them out. This is a meaningful for solo SSTB filers in the dead zone above the threshold — a $400 deduction is worth ~$96 at 24% marginal, but it's something.
Stay below the threshold if you can. A combination of pre-tax retirement contributions, HSA, and itemized deductions can pull taxable income below the threshold. For a solo professional, this often turns a $0 QBI deduction into a full 20% deduction.
S-corp election for SSTBs near the threshold. If you're a SSTB sole prop near the threshold, an S-corp election lets you split income into "reasonable W-2 salary" + "distribution." The W-2 portion isn't QBI, but it's also not subject to the SSTB cliff. The distribution portion is QBI. Net effect: more of your income qualifies.
Hire employees / own property if you're above the threshold and non-SSTB. The W-2/UBIA cap rewards both. A business with no employees gets nothing above threshold; a business with $200k of payroll gets $100k of cap headroom.
Don't over-pay yourself W-2 in an S-corp. S-corp owner-employees pay themselves W-2 wages + take distributions. The W-2 portion is NOT QBI. Pay yourself only what's "reasonable compensation" for the work — over-paying loses QBI on the excess.
The QBI deduction is part of the OBBB regime that sunsets after 2029. Starting 2030, § 199A reverts to its pre-2018 state — there is no QBI deduction. Run the scenario picker toggling between current_law and alt_2030_default to see the impact on your projected tax bill if Congress doesn't extend.
The /taxes page federal-breakdown line "QBI deduction" reflects what the engine computed for the current year. The full math (W-2/UBIA test + SSTB cliff + $400 minimum) runs automatically when you've added a self-employment income with the SE block fields filled (business type, W-2 wages paid, UBIA). For SSTB filers, the engine applies the cliff phase-out automatically.
Try it in your scenario
Known limitations
Sources
Educational information distilled from the Horizons engine methodology — not individual financial advice.
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