The Qualified Business Income deduction lets eligible pass-through owners deduct up to 20% of qualified business income before calculating federal income tax. After the 2025 tax law it is a permanent part of the code, no more expiration (OBBBA). Most guides stop at "up to 20%." That phrase hides the part that actually matters to a tax planner, so let me run real numbers.

The headline. If you own a sole proprietorship, partnership, S-corp, or an LLC taxed as one of those, you may deduct 20% of your qualified business income. It applies whether you itemize or take the standard deduction, and it lowers the maximum effective federal rate on that income to about 29.6% instead of 37% for owners under the income thresholds.

The catch most people miss. The deduction is the lesser of two numbers: 20% of your QBI, or 20% of your taxable income before the deduction (minus net capital gains). That second limit surprises owners constantly.

Here is a clean example. Single-filer sole proprietor, no capital gains, income comfortably under the 2026 threshold of $201,750 (Rev. Proc. 2025-32):

  • Net business profit (QBI): $120,000
  • Taxable income before the QBI deduction: $100,000
  • Step 1: 20% of QBI = 20% × $120,000 = $24,000
  • Step 2: 20% of taxable income = 20% × $100,000 = $20,000
  • QBI deduction = the lesser = $20,000

That $20,000 comes straight off taxable income. At a 22% marginal rate, that is roughly $4,400 in federal tax saved on a single line. The taxable-income limit is why the deduction came out at $20,000 rather than $24,000, and it is exactly the kind of interaction a planner works around by managing the timing of income and deductions.

Two things new for 2026. There is now a guaranteed minimum: if you have at least $1,000 of active QBI and you materially participate, you get at least a $400 deduction even when the normal math would give less. And the phase-in ranges widened, which means more owners near the thresholds keep at least a partial deduction (OBBBA / Rev. Proc. 2025-32).

The important limit. The QBI deduction lowers your federal income tax only. It does not reduce self-employment tax, the net investment income tax, or the additional Medicare tax. So it works alongside an S-corp election strategy, it does not replace one.

Common questions

Is the QBI deduction permanent? Yes. The 2025 law removed the sunset. It applies to 2026 returns filed in 2027 and beyond.

How much is it worth? Up to 20% of qualified pass-through income, subject to a taxable-income limit, with a $400 minimum for active businesses in 2026.

Does an S-corp affect it? Yes. The salary-versus-distribution split changes the size of the deduction, which is why compensation planning and QBI go together.

Getting the full deduction is a planning job, not a filing job. HYON Q structures compensation and entity setup around QBI before year-end. Free 30-minute call: https://www.hyonq.com/book-consultation