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 roughly $200,000 for single filers and $400,000 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, and added a minimum $400 deduction for anyone with at least $1,000 of QBI from an active business they materially participate in.
The second guardrail applies to non-SSTB owners above the threshold, and it is the one that ties back to entity choice. Their deduction is capped at the greater of:
Here is the trap. 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.