The Qualified Business Income Deduction

IRC §199A grants owners of pass-through businesses — sole proprietors, partnerships, and S-corporations — a deduction of up to 20% of their Qualified Business Income (QBI). OBBBA made the deduction permanent, removing the 2025 sunset that had hung over it since 2018. Below the income thresholds the deduction is simple: 20% of QBI, full stop. Above them, two sets of guardrails appear, and they are where planning happens.

The thresholds are taxable income of $201,750 for single filers and $403,500 for joint filers in 2026, indexed annually. The first guardrail concerns what kind of business you run. A specified service trade or business (SSTB) — broadly, businesses trading on the skill or reputation of their people: health, law, accounting, consulting, financial services, performing arts, athletics, and the like (engineering and architecture are specifically excluded) — loses the deduction entirely once taxable income clears the top of the phase-out range. For an SSTB owner over that ceiling, the IRC §199A deduction is precisely zero. OBBBA, beginning in 2026, widened the phase-out range to $75,000 above the threshold for single filers and $150,000 for joint filers — so the deduction is fully extinguished at $276,750 and $553,500 — and added a minimum $400 deduction for anyone with at least $1,000 of QBI from an active business they materially participate in. Both the $400 and the $1,000 are indexed after 2026.

The second guardrail is the wage-and-property limitation, and it is the one that ties back to entity choice. It phases in across the same range for every business, SSTB or not; above the top of the range it applies in full to non-SSTB owners, while SSTB owners have by then lost the deduction outright and never reach it. Where it bites, the deduction is capped at the greater of:

1.

50% of the W-2 wages the business paid, or

2.

25% of W-2 wages plus 2.5% of the unadjusted basis (UBIA) of the business’s qualified depreciable property.

The statutory trap is straightforward: a non-SSTB sole proprietor pays no W-2 wages to its owner and, if the business is asset-light, owns little qualified property. Both limbs of the test point near zero — so a profitable, fully eligible business can see its QBI deduction capped at almost nothing. Electing S-corporation status fixes it: the reasonable salary the owner now draws is W-2 wages paid by the business, and it feeds the 50%-of-wages limb. The salary cannot be set for this purpose alone — wages are not themselves QBI, so an oversized salary shrinks the very income the deduction applies to — but within the range that reasonable compensation already allows, the wage level becomes a lever worth pulling deliberately.