Deduction for Qualified Business Income

Beginning in 2018 under the Tax Cut and Jobs Act of 2017 and continuing under new provisions in the One Big Beautiful Bill Act (OBBBA) of 2025, an individual taxpayer (and certain trusts and estates) may claim an income tax deduction equal to 20% of the taxpayer’s allocable share of qualified domestic business income (QBI) from a partnership, S corporation, or sole proprietorship. The deduction is also available for qualified REIT dividends, specified cooperative dividends, and income from publicly traded partnerships, subject to applicable limitations.

The qualified business income deduction is available only for federal income tax (e.g., it is not available for purposes of the net investment income tax, which is a Medicare tax). The qualified business income deduction is taken against taxable income; it does not affect adjusted gross income and can be taken whether or not you itemize deductions. For purposes of determining alternative minimum taxable income, qualified business income is determined without regard to alternative minimum tax adjustments and preferences.

Determining the amount of the deduction: (1) Apply deduction limit for each trade or business

Certain aggregation may be possible in determining each trade or business if certain requirements are met.

Initially, the deductible amount for each qualified trade or business is equal to 20% of the taxpayer’s qualified business income (the “20% of QBI limit”). Depending on the amount of your taxable income, the deductible amount for each qualified trade or business may also be limited to the greater of (a) 50% of the W-2 wages or (b) the sum of 25% of the W-2 wages plus 2.5% of the unadjusted basis immediately after acquisition of all qualified property (the “wage/asset limit”). W-2 wages means wages (including elective deferrals) paid by the person to employees and attributable to the qualified business income. The unadjusted basis is typically the purchase price. Qualified property means depreciable tangible property held and used by the qualified business during the first 10 years after being placed in service, or during the normal applicable recovery period for the property under the accelerated cost recovery system, if longer.

The wage/asset limit on the deductible amount for each qualified trade or business does not apply if your taxable income does not exceed the wage/asset limit phase-in threshold. Under the OBBBA, for tax years beginning after 2025, this limit is phased in over the next $75,000 ($150,000 for married filing jointly) of taxable income. In addition, active business owners with at least $1,000 of QBI may be eligible for a new minimum deduction of $400, regardless of these limitations.

Wage/Asset Limit Phase-in Table (2025)
	Initial threshold	Phase-in range	Final threshold
Married filing jointly	$394,600	$100,000	$494,600
All Others	$197,300	$50,000	$247,300

Wage/Asset Limit Phase-in Table (2026)
	Initial threshold	Phase-in range	Final threshold
Married filing jointly	$403,500	$150,000	$553,500
All Others	$201,750	$75,000	$276,750

Specified service business. A deduction may also be available for income from a specified service business if your taxable income does not exceed the initial phase-in threshold plus $75,000 ($150,000 for married filing jointly). In the case of specified service businesses, an applicable percentage (100% minus the wage/asset limit phase-in percentage) is also applied in the formulas above to determine the qualified business income, W-2 wages, and the unadjusted basis immediately after acquisition of all qualified property. After enactment of OBBBA, this deduction is made permanent. A deduction is not available for income from a specified service business if your taxable income exceeds the initial phase-in threshold plus $75,000 ($150,000 for married filing jointly). Specified service businesses involve the performance of services in fields including health, law, accounting, actuarial science, performing arts, consulting, athletics, and financial services.

If your taxable income does not exceed the initial threshold, a specified service business is treated as a qualified business. If you are within the phase-in range, only an applicable percentage (see above) of a specified service business is treated as a qualified business. If your taxable income exceeds the final threshold, a specified service business is not treated as a qualified business. For tax years beginning in 2026, the OBBBA also introduces a new minimum deduction of $400 for active business owners with at least $1,000 of QBI, which may provide a baseline benefit regardless of these thresholds.

REITs, publicly traded partnerships, and cooperatives. This limit does not generally apply to qualified REIT dividends and publicly traded partnership income (which are accounted for separately below). Additional limits apply to income received from cooperatives.

Determining the amount of the deduction: (2) Apply deduction limit to all qualified business income

In general, the deduction is equal to the lesser of (a) the combined qualified business income amount of the taxpayer, or (b) 20% of the excess of the taxpayer’s taxable income over the sum of any net capital gain of the taxpayer. For purposes of this deduction, taxable income is determined without regard for this deduction and net capital gain includes qualified dividends.

The combined qualified business income amount means the sum of the deductible amount for each qualified trade or business (as determined above) plus 20% of the qualified REIT dividends and publicly traded partnership income of the taxpayer.

Prepared by Broadridge Advisor Solutions. © 2026 Broadridge Financial Services, Inc.

While we specialize in tax planning, please note that we do not offer specific tax services, so you will want to consult your tax preparer before implementing any tax-planning strategies we introduce. Any reduction in taxes would depend on an individual’s tax situation.

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