The QBI Deduction: 20% Off Pass-Through Income

If you have freelance or business income, this is probably the largest tax break available to you — and it is the one people most often don't know they qualify for, because nothing on the invoice mentions it.

Last verified 2026-07-26

A deduction with nothing to elect and nothing to buy

Section 199A lets most owners of pass-through businesses deduct up to 20% of their qualified business income — net profit from a US trade or business, excluding wages, capital gains, dividends and interest.

It sits below the line in a category of its own. You subtract it after the standard or itemized deduction rather than instead of one, so taking the standard deduction costs you nothing here. That is unusual, and it is a large part of why the deduction gets missed: there is no box to tick, no purchase to make, and nothing to give up.

It also doesn't require an entity. A sole proprietor filing a plain Schedule C qualifies exactly as a partnership or S-Corp shareholder does — which is the opposite of what the phrase 'business deduction' suggests to most people.

Everything complicated switches on at one line

Below the taxable-income threshold — $201,750 single, $403,500 joint for 2026 — the deduction is close to universal. Whatever your trade, whatever you pay in wages, you get the full 20%.

Above it, two limits phase in across a range. The wage-and-property limit caps the deduction by the W-2 wages your business pays and the capital it holds. And specified service trades — consulting, law, health, accounting, financial services, performing arts — begin losing the deduction entirely.

The ramp matters. These aren't cliffs: at a third of the way through the phase-out range, a third of the restriction applies. Being slightly over the line costs you a little rather than everything, and the range is what makes the arithmetic worth doing rather than despairing at.

Taxable income is partly a decision

The threshold is measured against your taxable income, not your business revenue — and taxable income is something you have levers on.

A larger retirement contribution, a health savings account deposit, or bunching deductions into the right year all reduce taxable income. Near the phase-out, each of those does double duty: it saves tax at your marginal rate, and it restores QBI deduction you were about to lose.

For a service business near the top of the range that combination can be worth far more than the contribution's own tax saving, because the alternative is a deduction falling to zero. It is one of the few places in the code where the return on a retirement contribution is genuinely larger than it looks.