The QBI deduction, also called the Section 199A deduction, lets many sole proprietors, partners and S corporation owners deduct up to 20% of their qualified business income. You don't need to itemize to claim it, but it's capped at 20% of taxable income minus net capital gain, and higher earners face extra limits.
If you're self-employed and file Schedule C, there's a good chance you're leaving the QBI deduction on the table if you don't know about it. It's one of the more generous breaks for small business owners because it's a percentage of profit, and it doesn't require itemising. It's also one of the more confusing, so here's the version the IRS gives, in plain English.
Who can take the QBI deduction
| Business type | Eligible? |
|---|---|
| Sole proprietorship (Schedule C) | Yes, may be |
| Partnership | Yes, may be |
| S corporation owner | Yes, may be, on QBI but not on the salary the company pays you |
| Some trusts and estates | Yes, may be |
| C corporation | No, it's for pass-through owners |
The IRS says it's available whether you itemise on Schedule A or take the standard deduction. That's the big practical point: most freelancers take the standard deduction, and they can still claim QBI.
How much is it?
Up to 20% of your qualified business income, plus 20% of qualified REIT dividends and qualified PTP income. But the total is capped at 20% of your taxable income minus net capital gain. For many self-employed people with modest income, the cap is the number that bites.
What counts as qualified business income
QBI is the net income from your qualified business, not your gross sales. And the IRS says it's generally reduced by a few things you may not expect:
- The deductible part of your self-employment tax.
- Self-employed health insurance.
- Contributions to qualified retirement plans like SEP and SIMPLE plans.
So if your Schedule C profit is one figure, your QBI is usually a bit lower once those are taken off.
What doesn't count
- Interest income that isn't allocable to the business.
- Reasonable compensation paid to you by your S corporation.
- Fixed payments a partnership makes to a partner that the IRS lists as excluded.
- Tip income excluded under the new no-tax-on-tips rules for tax years 2025 through 2028.
The S corporation point matters if you're deciding on a structure. The salary your company pays you isn't QBI, only the remaining business profit is.
The new minimum deduction from 2026
Here's the change most articles haven't caught up with. For tax years beginning after 2025, the IRS says the deduction is limited to the greater of the usual taxable income limitation amount or a new Minimum Deduction for Active Qualified Business Income. "Active" means a business you materially participate in. In practice, that helps small, hands-on business owners whose deduction would otherwise be squeezed by the limits. Check the current Form 8995 instructions for how it's worked out for your return.
A simple example
Say your Schedule C profit is 50,000 dollars, and the deductible part of your self-employment tax plus your SEP contribution add up to 8,000 dollars. Your QBI is 42,000 dollars, and 20% of that is 8,400 dollars. If your taxable income minus net capital gain is 35,000 dollars, 20% of that is 7,000 dollars, so the deduction is capped at 7,000 dollars. These sums are mine, worked from the IRS rules, to show how the cap works.
QBI and your other deductions
QBI sits alongside the standard deduction rather than replacing it, which is why it's so valuable for freelancers. But because the cap is based on taxable income, anything that lowers your taxable income, like a bigger retirement contribution, can also lower your QBI deduction. It's a trade-off, not a reason to avoid saving for retirement. Just don't be surprised when one moves the other.
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Limits for higher earners
Above certain taxable income levels, the QBI part of the deduction can be limited by the type of business, the W-2 wages it pays and the unadjusted basis of its qualified property. That's when Form 8995-A comes in rather than the simpler Form 8995. If your income is near those levels, this is one to run past a tax preparer.
How to claim it
- Work out your net profit on Schedule C (or get your share from a partnership or S corporation).
- Reduce it by the deductible part of SE tax, self-employed health insurance and retirement plan contributions to get QBI.
- Use Form 8995, or Form 8995-A if the higher-income limits apply.
- Compare 20% of QBI with 20% of taxable income minus net capital gain, and take the lower figure.
- From 2026 returns onward, check the minimum deduction for active businesses too.
Rental property owners
Renting out property isn't automatically a business for QBI purposes. The IRS has a safe harbor that can treat a rental real estate enterprise as a trade or business if certain conditions are met, set out in Revenue Procedure 2019-38.
My verdict
If you file Schedule C and make a profit, check you've claimed QBI: it's a percentage of profit, it doesn't need itemising, and tax software can miss it if your profit figures are messy. Clean books make it simple, so see what a remote bookkeeper does and when a tax preparer earns their fee.
Frequently asked questions
What is the QBI deduction?
A deduction of up to 20% of qualified business income for owners of sole proprietorships, partnerships, S corporations and some trusts and estates.
Do I need to itemize to get the QBI deduction?
No. The IRS says it's available whether you itemise or take the standard deduction.
Is my S corporation salary QBI?
No. Reasonable compensation from an S corporation is excluded from QBI.
What changed for the QBI deduction after 2025?
For tax years beginning after 2025, the deduction is the greater of the usual limited amount or a new minimum deduction for active qualified business income.
Which form do I use for the QBI deduction?
Form 8995, or Form 8995-A when the higher-income limitations apply.
