Business Tax Preparation · Business expenses, deductions and credits

Qualified business income

Three things about this deduction changed in July 2025, and the first of them is that it did not expire. A reader working from material written before then will believe the section stopped applying after 2025, will use a phase-in range a third narrower than the real one, and will not know that a small active business now has a floor beneath its deduction.

The rule

The deduction. the lesser of the combined qualified business income amount or 20 percent of the excess of taxable income over net capital gain — subject to the IRC § 199A(i) minimum^TY2026Verified 2026-08-19IRC § 199A(a)(1), (2)(A), (B) — https://www.law.cornell.edu/uscode/text/26/199A (IRC § 199A(a)), where the first limb is the sum of the amounts determined for each qualified trade or business, plus 20 percent of the aggregate qualified REIT dividends and qualified publicly traded partnership income^TY2026Verified 2026-08-21IRC § 199A(b)(1), opened at law.cornell.edu/uscode/text/26/199A (IRC § 199A(b)(1)).

Per business. the lesser of 20 percent of the qualified business income of the trade or business, or the greater of 50 percent of its W-2 wages, or 25 percent of those wages plus 2.5 percent of the unadjusted basis immediately after acquisition of all qualified property^TY2026Verified 2026-08-21IRC § 199A(b)(2), opened at law.cornell.edu/uscode/text/26/199A (IRC § 199A(b)(2)).

Unless income is low enough. where taxable income does not exceed the threshold amount, the wage and property limitation is disregarded entirely and the deduction is simply 20 percent of qualified business income^TY2026Verified 2026-08-21IRC § 199A(b)(3)(A), opened at law.cornell.edu/uscode/text/26/199A (IRC § 199A(b)(3)(A)). The threshold is $403,500 on a joint return, $201,775 for a married individual filing separately, and $201,750 in any other case — the IRC § 199A(e)(2) threshold amounts for taxable years beginning in 2026^TY2026Verified 2026-08-21Rev. Proc. 2025-32 § 3.26, opened at irs.gov/pub/irs-drop/rp-25-32.pdf (Rev. Proc. 2025-32 § 3.26), and the limitation phases in fully by $553,500 on a joint return, $276,775 for a married individual filing separately, and $276,750 in any other case — the top of the IRC § 199A(b)(3)(B) and § 199A(d)(3)(A) phase-in range for taxable years beginning in 2026^TY2026Verified 2026-08-21Rev. Proc. 2025-32 § 3.26, opened at irs.gov/pub/irs-drop/rp-25-32.pdf.

Specified service businesses. a trade or business described in IRC § 1202(e)(3)(A), read without the words "engineering, architecture," and with "employees or owners" substituted for "employees", or one involving investing and investment management, trading, or dealing in securities, partnership interests or commodities^TY2026Verified 2026-08-21IRC § 199A(d)(2), opened at law.cornell.edu/uscode/text/26/199A (IRC § 199A(d)(2)). Below the threshold they are treated like any other business; above the phase-in range they are excluded entirely.

Qualified property. tangible property subject to the allowance for depreciation under IRC § 167 which is held by and available for use in the business at the close of the year, is used at any point during the year in producing qualified business income, and whose depreciable period has not ended before the close of the year^TY2026Verified 2026-08-21IRC § 199A(b)(6)(A), opened at law.cornell.edu/uscode/text/26/199A (IRC § 199A(b)(6)(A)).

The floor. $400 — for a taxpayer whose aggregate qualified business income from all active qualified trades or businesses is at least $1,000, the deduction is the greater of the ordinary computation or this amount; both figures are indexed from a 2025 base for taxable years beginning after 2026^TY2026Verified 2026-08-21IRC § 199A(i)(1), (i)(2)(A) and (i)(3), opened at law.cornell.edu/uscode/text/26/199A (IRC § 199A(i)), where an active business means a qualified trade or business in which the taxpayer materially participates within the meaning of IRC § 469(h)^TY2026Verified 2026-08-21IRC § 199A(i)(2)(B), opened at law.cornell.edu/uscode/text/26/199A (IRC § 199A(i)(2)(B)).

Current figures

How it works in practice

Work from taxable income, and ask which of three bands the taxpayer is in. Below the threshold, where taxable income does not exceed the threshold amount, the wage and property limitation is disregarded entirely and the deduction is simply 20 percent of qualified business income^TY2026Verified 2026-08-21IRC § 199A(b)(3)(A), opened at law.cornell.edu/uscode/text/26/199A (IRC § 199A(b)(3)(A)) — no wage test, no property test, and a specified service business is treated like any other. Above the top of the phase-in range, the wage and property limitation applies in full and a specified service business gets nothing at all. Between the two, both effects phase in ratably.

The threshold is measured on taxable income, not on business income. IRC § 199A(e)(2) defines the threshold amount by reference to the taxpayer’s taxable income computed without the section’s own deduction. So a taxpayer with modest business profits but large investment income can be above the threshold, and one with a large business and large deductions elsewhere can be below it.

Above the range, the limitation is the greater of two figures, not the lesser. the lesser of 20 percent of the qualified business income of the trade or business, or the greater of 50 percent of its W-2 wages, or 25 percent of those wages plus 2.5 percent of the unadjusted basis immediately after acquisition of all qualified property^TY2026Verified 2026-08-21IRC § 199A(b)(2), opened at law.cornell.edu/uscode/text/26/199A (IRC § 199A(b)(2)). The wage-only test and the wage-plus-property test are alternatives, and the taxpayer takes whichever is larger. That is why a capital-intensive business with few employees can still get a deduction: the second test brings in a share of the unadjusted basis of qualified property.

“Unadjusted basis immediately after acquisition” means before depreciation. tangible property subject to the allowance for depreciation under IRC § 167 which is held by and available for use in the business at the close of the year, is used at any point during the year in producing qualified business income, and whose depreciable period has not ended before the close of the year^TY2026Verified 2026-08-21IRC § 199A(b)(6)(A), opened at law.cornell.edu/uscode/text/26/199A (IRC § 199A(b)(6)(A)) requires the property still to be held and available for use at the close of the year, to have been used during the year in producing qualified business income, and to be inside its depreciable period. But the figure taken into account is the original cost, undiminished by depreciation — including where the cost was expensed in full under IRC § 179 or through bonus depreciation.

A specified service business is defined by cross-reference, and the cross-reference has a carve-out. a trade or business described in IRC § 1202(e)(3)(A), read without the words "engineering, architecture," and with "employees or owners" substituted for "employees", or one involving investing and investment management, trading, or dealing in securities, partnership interests or commodities^TY2026Verified 2026-08-21IRC § 199A(d)(2), opened at law.cornell.edu/uscode/text/26/199A (IRC § 199A(d)(2)). The list in IRC § 1202(e)(3)(A) covers health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services and brokerage services, plus any business whose principal asset is the reputation or skill of one or more of its employees or owners — and IRC § 199A(d)(2)(A) applies it “without regard to the words ‘engineering, architecture,’”. Engineers and architects are therefore not specified service businesses, which is the single most useful thing to know about the list.

Below the threshold, none of that matters. A doctor with taxable income under the threshold gets the full deduction. The specified service exclusion is not a disqualification from the section; it is a rule that operates only as income rises.

And now there is a floor. $400 — for a taxpayer whose aggregate qualified business income from all active qualified trades or businesses is at least $1,000, the deduction is the greater of the ordinary computation or this amount; both figures are indexed from a 2025 base for taxable years beginning after 2026^TY2026Verified 2026-08-21IRC § 199A(i)(1), (i)(2)(A) and (i)(3), opened at law.cornell.edu/uscode/text/26/199A (IRC § 199A(i)). It reaches a taxpayer whose aggregate qualified business income from active businesses clears a small floor, and it gives the greater of the ordinary computation or a fixed amount. a qualified trade or business in which the taxpayer materially participates within the meaning of IRC § 469(h)^TY2026Verified 2026-08-21IRC § 199A(i)(2)(B), opened at law.cornell.edu/uscode/text/26/199A (IRC § 199A(i)(2)(B)) — material participation, so a passive investor in a business does not qualify. Both figures are indexed for taxable years beginning after 2026.

How this has changed

Three changes in one section of one Act, and all three take effect for 2026. Pub. L. 119-21 § 70105 did the following.

It made the deduction permanent. permanent — Pub. L. 119-21 § 70105(b)(1) amended IRC § 199A(i) generally, replacing the sentence "This section shall not apply to taxable years beginning after December 31, 2025" with the minimum deduction rule^TY2026Verified 2026-08-21Amendment note to IRC § 199A(i), opened at law.cornell.edu/uscode/text/26/199A. IRC § 199A(i) previously consisted of a single sentence terminating the section after 2025. Section 70105(b)(1) amended that subsection generally, and § 70105(b)(2) inserted “except as provided in subsection (i),” into IRC § 199A(a) so that the new subsection could operate as a floor rather than a termination. The termination is gone; there is no successor date.

It widened the phase-in range by half. the phase-in range was widened from $50,000, or $100,000 on a joint return, to $75,000 and $150,000 by Pub. L. 119-21 § 70105(a), in both IRC § 199A(b)(3)(B) and § 199A(d)(3)^TY2026Verified 2026-08-21IRC § 199A(b)(3)(B)(i)(I) and its amendment notes, opened at law.cornell.edu/uscode/text/26/199A. Section 70105(a)(1) made the substitution in IRC § 199A(b)(3)(B), which governs the wage and property limitation, and § 70105(a)(2) made it in IRC § 199A(d)(3), which governs the specified service exclusion. Both ranges widened together, so a specified service business now keeps some deduction over a span half as long again as before. For 2026 the range runs from $403,500 on a joint return, $201,775 for a married individual filing separately, and $201,750 in any other case — the IRC § 199A(e)(2) threshold amounts for taxable years beginning in 2026^TY2026Verified 2026-08-21Rev. Proc. 2025-32 § 3.26, opened at irs.gov/pub/irs-drop/rp-25-32.pdf to $553,500 on a joint return, $276,775 for a married individual filing separately, and $276,750 in any other case — the top of the IRC § 199A(b)(3)(B) and § 199A(d)(3)(A) phase-in range for taxable years beginning in 2026^TY2026Verified 2026-08-21Rev. Proc. 2025-32 § 3.26, opened at irs.gov/pub/irs-drop/rp-25-32.pdf.

It added a minimum deduction. $400 — for a taxpayer whose aggregate qualified business income from all active qualified trades or businesses is at least $1,000, the deduction is the greater of the ordinary computation or this amount; both figures are indexed from a 2025 base for taxable years beginning after 2026^TY2026Verified 2026-08-21IRC § 199A(i)(1), (i)(2)(A) and (i)(3), opened at law.cornell.edu/uscode/text/26/199A (IRC § 199A(i)). This is new law with no predecessor, and it is directed at the smallest businesses — the ordinary computation beats it once qualified business income passes a modest level. IRC § 199A(i)(3) indexes both of its figures from a 2025 base for taxable years beginning after 2026, so 2026 is the only year in which they are the statutory amounts.

A fourth change, from a different section, is easy to miss. Pub. L. 119-21 § 70111(b) inserted references to IRC § 68 into IRC § 199A(e)(1) and IRC § 199A(g)(2)(B), so that taxable income for those purposes is computed without regard to the overall limitation on itemized deductions. That conforming amendment was needed because the same Act rewrote IRC § 68 and brought it back into operation for taxable years beginning after 2025 — so the two provisions became live in the same year and had to be told about each other.

Exam focus

Place the taxpayer in one of three bands first: below the threshold, inside the range, or above it. Almost every question turns on which, and the facts always supply taxable income.

Below the threshold, the computation is simple and specified service status is irrelevant. Above the range, apply the wage and property limitation and exclude a specified service business entirely. Inside, both phase in.

Learn the wage and property test as “the greater of,” and learn that qualified property is counted at unadjusted basis.

For 2026 specifically, know the three changes: permanence, the wider range, and the new minimum deduction for an active business. Material written before July 2025 is wrong on all three.

Check yourself

1. An unmarried architect has $400,000 of qualified business income and taxable income of $600,000, pays $90,000 of W-2 wages and holds no qualified property. Is she excluded as a specified service business?

Answer: No. a trade or business described in IRC § 1202(e)(3)(A), read without the words "engineering, architecture," and with "employees or owners" substituted for "employees", or one involving investing and investment management, trading, or dealing in securities, partnership interests or commodities^TY2026Verified 2026-08-21IRC § 199A(d)(2), opened at law.cornell.edu/uscode/text/26/199A (IRC § 199A(d)(2)(A)) applies IRC § 1202(e)(3)(A) without regard to the words “engineering, architecture,” so architecture is not a specified service trade or business. She is above the range, so the wage limitation applies in full: her deduction is limited to 50 percent of $90,000, or $45,000, against 20 percent of $400,000.

2. A business has $500,000 of qualified business income, pays no wages, and holds qualified property with an unadjusted basis of $3,000,000. The owner is above the range. What is the limitation?

Answer: $75,000. the lesser of 20 percent of the qualified business income of the trade or business, or the greater of 50 percent of its W-2 wages, or 25 percent of those wages plus 2.5 percent of the unadjusted basis immediately after acquisition of all qualified property^TY2026Verified 2026-08-21IRC § 199A(b)(2), opened at law.cornell.edu/uscode/text/26/199A (IRC § 199A(b)(2)(B)) takes the greater of 50 percent of W-2 wages — nil — and 25 percent of wages plus 2.5 percent of unadjusted basis, which is nil plus $75,000. The deduction is the lesser of that and 20 percent of $500,000, so $75,000.

3. A dentist has taxable income below the threshold amount. Does the specified service exclusion reduce his deduction?

Answer: No. where taxable income does not exceed the threshold amount, the wage and property limitation is disregarded entirely and the deduction is simply 20 percent of qualified business income^TY2026Verified 2026-08-21IRC § 199A(b)(3)(A), opened at law.cornell.edu/uscode/text/26/199A (IRC § 199A(b)(3)(A)) and IRC § 199A(d)(3) both operate only above the threshold. Below it he is treated like any other business and takes 20 percent of qualified business income, subject to the overall taxable income cap in IRC § 199A(a)(2).

4. Does IRC § 199A apply to a taxable year beginning in 2026?

Answer: Yes. permanent — Pub. L. 119-21 § 70105(b)(1) amended IRC § 199A(i) generally, replacing the sentence "This section shall not apply to taxable years beginning after December 31, 2025" with the minimum deduction rule^TY2026Verified 2026-08-21Amendment note to IRC § 199A(i), opened at law.cornell.edu/uscode/text/26/199A — the former IRC § 199A(i), which terminated the section after 2025, was replaced in its entirety by Pub. L. 119-21 § 70105(b)(1), and the new subsection (i) is a minimum deduction rule rather than a termination.

5. A taxpayer materially participates in one business producing $1,500 of qualified business income and has no other business. What is her deduction?

Answer: The fixed minimum under $400 — for a taxpayer whose aggregate qualified business income from all active qualified trades or businesses is at least $1,000, the deduction is the greater of the ordinary computation or this amount; both figures are indexed from a 2025 base for taxable years beginning after 2026^TY2026Verified 2026-08-21IRC § 199A(i)(1), (i)(2)(A) and (i)(3), opened at law.cornell.edu/uscode/text/26/199A (IRC § 199A(i)), because it exceeds the ordinary computation of 20 percent of $1,500, or $300, and her aggregate active qualified business income clears the floor. a qualified trade or business in which the taxpayer materially participates within the meaning of IRC § 469(h)^TY2026Verified 2026-08-21IRC § 199A(i)(2)(B), opened at law.cornell.edu/uscode/text/26/199A is satisfied by her material participation.