The Qualified Business Income (QBI) Deduction, also sometimes referred to by its code section 199A, was a Tax Cuts and Jobs Act provision that allows taxpayers with, you guessed it, qualified business income, to take a deduction of up to 20% of their QBI from eligible trades or businesses. That amount is then capped so it can’t exceed 20% of the taxpayer’s taxable income (before QBI) after reducing that taxable income by net capital gains.
When certain taxable income thresholds are hit, additional limitations kick in.
For taxpayers below the threshold, they generally calculate 20% of their QBI (plus any REIT/PTP component, if applicable) and then compare it to 20% of taxable income less net capital gains, and the deduction is the lesser of those two numbers.
Once the threshold is exceeded and the phase‑in rules apply, we look to the amount of W‑2 wages paid by the business and the unadjusted basis of property immediately after acquisition (UBIA) that the business owns to determine how much of that 20% QBI amount you’re actually allowed to keep.
At higher income levels, the QBI component for each business is effectively limited to the lesser of 20% of that business’s QBI or the greater of (a) 50% of its W‑2 wages, or (b) 25% of its W‑2 wages plus 2.5% of its UBIA.
The limits hit earlier and phaseouts are more common among taxpayers operating Specified Service Trades or Businesses (SSTBs). Determining if a taxpayer is, in fact, operating an SSTB can get complicated, but the oversimplification is that many businesses in fields like health, law, accounting, consulting, and similar professions will fall into this bucket under the statute and regulations.
Understanding the intricacies of the SSTB classification will be even more important as the rules for deducting qualified tips are fully implemented, because the new tips deduction looks to the § 199A SSTB framework in deciding who qualifies. For more on this quirk of the tips deduction, check out our article here.
If you’re looking for an in-depth refresher on QBI, join us this fall for the 2026 Tax Toolbox.