Who Qualifies for the QBI Deduction (and Who Doesn’t)?

If you earn income through a business, the Qualified Business Income deduction could still help reduce your taxable income through 2026. It was introduced under the Tax Cuts and Jobs Act and remains one of the most talked-about tax breaks for small business owners and self-employed professionals.

The idea sounds simple — take a deduction for part of your business income. But the rules are not the same for everyone. 

In this guide, we’ll walk you through who generally qualifies for the QBI deduction, who may not, and what to review before you file.

📌 Also read: 2026 Retirement Planning Checklist for the Self-Employed

Who Qualifies Under Section 199A in 2026

The Qualified Business Income (QBI) deduction under IRC Section 199A generally applies to domestic business owners whose income flows through to their personal return. It continues to cover a wide range of small business structures through the 2026 tax year.

The deduction may reduce taxable income by up to 20% of qualified business income, but only if the activity meets the requirements set out by the IRS. C corporations and employee wages are not eligible because those do not count as pass-through income.

Eligible income must be:

✅ Earned from a qualified trade or business operated within the United States.
✅ Reported as net qualified income, gain, deduction, or loss tied to that activity.
✅ Separate from any foreign-source income, which is excluded from the calculation.

Owners can also include a REIT/PTP component, which refers to qualified dividends from Real Estate Investment Trusts (REITs) and income from Publicly Traded Partnerships (PTPs). Both can increase the overall deduction when reported correctly.

📝 Note: The QBI deduction is claimed using Form 8995 for straightforward cases or Form 8995-A when limitations apply. Each form comes with IRS instructions that outline how thresholds and wage/property tests are handled.

Eligible Pass-Through Entities

The deduction applies to individuals, trusts, and estates that report qualified U.S. business income through pass-through entities. These include:

✅ Sole proprietors — Report income on Schedule C (Form 1040) for a business or profession operated regularly and with a profit motive.

✅ Partners and S corporation shareholders — Report pass-through items on Schedule E (Form 1040).

✅ Farm businesses — Report income on Schedule F (Form 1040).

✅ Trusts and estates — Pass QBI items to beneficiaries (or compute their own deduction) using Form 1041 and Schedule K-1 with the relevant Code I statements.

Each filer determines eligibility based on their share of qualified income and uses Form 8995 or 8995-A depending on the complexity of their situation.

Core Eligibility Rules

To qualify for the QBI deduction, the activity must rise to the level of a trade or business for tax purposes. It must be operated with continuity, regularity, and a genuine intent to earn a profit.

To generate QBI, the activity must:

✅ Be effectively connected with a trade or business inside the United States.
✅ Exclude income such as capital gains, dividends, interest, and employee wages.
✅ Follow the IRS definition of a qualified trade or business.

Rental real estate may also qualify when it meets these trade-or-business standards. The IRS provides a safe harbor that allows certain rental real estate enterprises to be treated as a qualified trade or business if they satisfy recordkeeping and hours-of-service requirements.

📝 Note: The safe harbor for rental real estate was finalized in Revenue Procedure 2019-38. Taxpayers relying on this provision should maintain time logs, separate books / records, and a signed statement attached to their return confirming eligibility.

When the Deduction Gets Limited or Lost

The Qualified Business Income deduction under Section 199A is not unlimited. Once taxable income rises above certain levels, the rules start to narrow who can claim the full 20% break. The limitation works differently depending on whether the business is a Specified Service Trade or Business (SSTB) or a non-SSTB.

Service-based professions — such as health, law, accounting, consulting, athletics, and financial services — fall under the SSTB category. These businesses gradually lose access to the deduction as taxable income moves through an IRS-defined “phase-out” range.

Non-SSTBs, by contrast, keep the deduction even at higher income levels, but it becomes subject to an additional test based on the company’s payroll and property values. Both concepts are detailed in Treasury regulations and the Form 8995-A instructions for the 2026 tax year.

📝 Note: The QBI phase-outs are adjusted for inflation each year. The 2026 thresholds below come from the IRS draft instructions and may shift slightly in final publication.

SSTB Phase-Out Ranges for 2026

The IRS sets income ranges where an SSTB’s QBI deduction starts shrinking and eventually disappears. Inside this range, part of the deduction may remain available, but once taxable income exceeds the upper limit, the business no longer qualifies for any QBI deduction.

Phase-out ranges for 2026:

These figures apply to taxable income before the QBI deduction and after all other adjustments on the return. Once income exceeds the top of the phase-out band, an SSTB is no longer considered a qualified trade or business for QBI purposes. At that point, none of its QBI, W-2 wages, or unadjusted basis (UBIA) counts toward the deduction.

📝 Note: The regulations make this exclusion clear and confirm that once an SSTB exceeds its phase-out ceiling, the QBI deduction for that activity is completely lost.

Wage and Property Cap for Non-SSTBs

Non-SSTBs are not subject to the same phase-out rule, but they face another limitation once income rises beyond the threshold amount. Instead of being phased out, their deduction is capped based on payroll and property.

Under this “greater-of” test, the deduction is the lesser of:

This test applies separately to each trade or business, unless multiple activities are properly aggregated. The IRS defines how W-2 wages and UBIA should be calculated and documented for accuracy.

📝 Note: The Form 8995-A instructions explain how to apply this limitation when your income falls within the $50,000 or $100,000 range above the threshold. Inside that band, the restriction phases in gradually rather than applying all at once.

Quick 3-Step Self-Check for 2026

Before claiming the Qualified Business Income (QBI) deduction, it helps to confirm that your income and business setup meet the basic requirements. This three-step check can help you understand which form and which limitation rules apply for 2026.

Step 1 – Confirm You Have Domestic Pass-Through Business Income

The QBI deduction applies only to U.S. pass-through income. Your activity must qualify as a trade or business operated through a sole proprietorship, partnership, S corporation, trust, or estate.

Employee wages are not eligible, and foreign-source income does not count toward QBI. If you file Schedule C, Schedule E, or Schedule F, or if you receive a K-1 or Form 1041 showing QBI items, you are generally in scope to calculate the deduction on Form 8995 or Form 8995-A.

📝 Note: The IRS requires the business to show a profit motive and consistent activity to qualify as a trade or business. Occasional or hobby income does not qualify.

Step 2 – Compare Your Taxable Income to the 2026 Thresholds

Next, check your taxable income after all deductions and credits but before applying the QBI deduction. Your position relative to these thresholds determines which set of rules applies.

For the 2026 tax year, the IRS draft instructions show:

If your income falls below the threshold, you can generally use the simplified computation. Inside the phase-out range, SSTBs start losing part of the deduction, while non-SSTBs apply the limitation formulas. Above the upper limit, SSTBs lose the deduction entirely.

📝 Note: Always confirm the final published thresholds before filing, since the IRS may adjust them for inflation.

Step 3 – Apply the Right Limitation Rule

Finally, apply the rule that matches your business type and income level.

If your business is an SSTB:

If your business is not an SSTB:

Once your taxable income exceeds the threshold, the QBI deduction is limited to the greater of:

Each trade or business must be evaluated separately unless they are properly aggregated under IRS rules.

📝 Note: Using Form 8995-A can help compute these limits when your income sits within the $50,000 or $100,000 range above the threshold.

Wrapping It Up

The Qualified Business Income deduction continues to offer potential tax savings for eligible pass-through business owners through 2026. How much you can claim depends on your business type, where the income is earned, whether it counts as an SSTB, and how your taxable income compares with the current thresholds.

A good next step is to organize the details that feed into the calculation:

From there, follow the Form 8995 or 8995-A instructions to see whether the deduction still applies and how much may remain. If you report rental income, confirm whether it meets the trade-or-business test or qualifies under the IRS safe harbor for rental real estate before including it in your QBI computation.

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