If you own a business that isn't a C corporation, the QBI deduction lets you deduct up to 20% of its profit. For many owners it happens automatically. For others, it shrinks or disappears, and what decides that is your taxable income for the year.
That's why the QBI deduction is a year-end issue. Your taxable income isn't final until December 31, and a few moves before then can decide whether you get the full 20%, part of it, or nothing.
The One Big Beautiful Bill Act made the deduction permanent. It was scheduled to end after 2025. The rate stays at 20%, and two rules changed starting in 2026:
Here's where the 2026 lines fall (married filing separately is $25 higher):
| Taxable income in 2026 | What happens to your deduction |
|---|---|
| Up to $201,750 ($403,500 joint) | The full 20% of qualified business income, with no wage or industry limits |
| $201,750 to $276,750 ($403,500 to $553,500 joint) | The limits phase in |
| Over $276,750 ($553,500 joint) | Service businesses get nothing. Other businesses are limited by the wages they pay and the property they own |
Two details trip people up. First, the test uses your taxable income from every source, including your spouse's wages and your capital gains, not just the business profit. Second, the deduction can never be more than 20% of your taxable income minus your net capital gain (long-term gains plus qualified dividends).
"Service businesses" here means health, law, accounting, consulting, financial services, and a few other fields. If you're not sure whether yours is one, see SSTB and the QBI deduction. For everyone else above the range, the deduction is capped at the greater of 50% of the W-2 wages the business pays, or 25% of those wages plus 2.5% of the original cost of its depreciable property. The QBI wage limitation walks through how that works.
If your taxable income is well under $201,750 ($403,500 joint), you're likely getting the full 20% already. The moves below matter most if you're near or inside the phase-in range. To see where you land, run your numbers through our 2026 QBI deduction calculator.
Every dollar you take off your taxable income can move you back toward the full deduction. But some deductions also shrink your qualified business income, and some don't. When you're trying to get under the threshold, the ones that don't are worth more.
These lower your taxable income and leave your qualified business income alone:
These lower both, so they help with the threshold but cost you some deduction along the way:
A Roth conversion adds to your taxable income and adds nothing to your qualified business income. If you're near the threshold, a conversion can push you into the phase-in range or past it. If you're in a service business, or your business pays few wages and owns little property, you can lose QBI deduction on top of the tax on the conversion.
It works the other way too. If your taxable income is comfortably under the threshold, you may be able to convert up to it without touching your QBI deduction. A conversion has to be done by December 31 to count for 2026, and it can't be undone, so run the numbers first. The same goes for other one-time income you control, like selling property or investments at a gain.
Your S corp salary isn't qualified business income. Only the profit after your salary is. So the right salary depends on where your taxable income lands.
Wages count only if they're paid in 2026 and reported on your W-2s, so adjust before the last payroll run of the year. The S-corp salary sweet spot for the QBI deduction has the full math.
Equipment you buy and place in service by December 31 can be written off in full this year with 100% bonus depreciation or Section 179. Many states, including California, don't follow federal bonus depreciation. That write-off lowers your taxable income, which can pull you below the threshold or deeper into the range.
It also lowers your qualified business income. If you're under the threshold already, every $1,000 you write off cuts your QBI deduction by about $200. You still come out ahead on the purchase itself, but the QBI deduction doesn't help.
Above the range, new property can help a business that isn't a service business. The property limit uses 2.5% of the original cost, even after you've written the cost off. To count, the property has to be in service and still held at year-end. Property bought in the last 60 days of the year and sold soon after doesn't count.
Example. Dana owns a small law firm taxed as an S corporation. Her 2026 salary is $150,000 and the firm's profit after her salary is $260,000. Her husband earns $90,000, and they take the standard deduction ($32,200). Their taxable income before the QBI deduction is $467,800. That's inside the joint phase-in range, and because law is a service business, their QBI deduction is limited to about $29,700.
The firm had planned to replace its computers, phones, and office furniture next year. Instead, it buys them for $60,000 in December, sets them up before year-end, and writes them off with bonus depreciation. Their taxable income drops to $407,800, close to the bottom of the range, and the QBI deduction rises to about $38,850. Between the write-off and the bigger QBI deduction, their 2026 federal income tax drops by about $19,400. The firm gives up the deduction it would have taken in 2027, so part of this is timing, but it lands in a year when the deduction is worth more.
Don't buy something you don't need for the deduction. But if the purchase is already planned, the timing can matter. For vehicles, see buying a business vehicle before December 31, and for equipment limits, Section 179 limits for 2026.
Rental income only counts if the rental is a trade or business. The IRS has a safe harbor that settles the question if you meet its tests, and one of them is 250 hours of rental services a year. For an enterprise that's been around four years or more, it's 250 hours in three of the last five years.
The hours can be yours, an employee's, or a property manager's. Time spent arranging financing, reviewing statements, or driving to the property doesn't count. You also need separate books for the rentals, a contemporaneous log of who did what and when, and a statement attached to your return. Triple net leases and properties you also use as a residence don't qualify.
If you rent property to your own business, such as a building your S corp or partnership operates from, the rental generally counts for the QBI deduction even without the 250 hours. That applies when the same people own at least 50% of both for most of the year, including December 31. It doesn't apply if the tenant is a C corporation. One catch: if the business renting it is a service business, like a law or medical practice, the rent is treated as service-business income too.
If you're close to 250 hours, check now that your log has been kept as you go. The safe harbor requires records made at the time, and they can't be recreated in April. Our CPA services for real estate investors cover this.
If you own several businesses with common ownership, you may be able to aggregate them, which means treating them as one for the wage and property limits. That can help when one business pays the wages and another earns the profit. Service businesses can't be aggregated.
The choice sticks. Once you aggregate, you have to keep doing it in later years, and you generally can't add it on an amended return. Separately, whether or not you aggregate, a business that lost money reduces the deduction from your profitable ones. Read QBI aggregation and the QBI deduction with two businesses before you decide.
The QBI deduction isn't something you claim in April and hope for the best. Whether you get it depends on choices you make now: your salary, your retirement contributions, whether you convert to a Roth, which investments you sell, and when you buy equipment.
Try a few what-ifs in the QBI deduction calculator first. If your taxable income is close to $201,750 ($403,500 joint), or you're not sure which side of the line you're on, book a free strategy call. We'll run your numbers before the year closes. For the basics, start with why some business owners lose the 20% break. For the rest of your year-end planning, see the year-end tax moves checklist for business owners.
To your ongoing success,
Laura
The limits start above $201,750 of taxable income, or $403,500 on a joint return. They phase in fully at $276,750, or $553,500 joint. Below the first number, most owners get the full 20%.
No. The One Big Beautiful Bill Act made it permanent. It also widened the phase-in range and added a $400 minimum deduction starting in 2026.
Anyone with at least $1,000 of qualified business income from businesses they materially participate in. Their deduction is the larger of the normal calculation or $400.
No. Only the S corp's profit after your salary counts. Your salary does count as W-2 wages for the wage limit, which matters once your income is inside or above the phase-in range.
Yes, if the rental rises to the level of a trade or business. The IRS safe harbor, which requires 250 hours of rental services a year (or in three of the last five years for older rentals) and records kept as you go, is the simplest way to show it.
This is general information, not tax or legal advice. Whether a move helps depends on your income, your business, your state, and what else is on your return. Talk to your tax advisor about your situation.
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