Key takeaways
- The deduction is up to 20% of QBI, limited to 20% of taxable income before the deduction minus net capital gain (IRS).
- For 2026, extra limits start above taxable income of $201,750 ($403,500 married filing jointly) and fully apply at $276,750 ($553,500), per Rev. Proc. 2025-32.
- From 2026, a minimum deduction of $400 applies if you have at least $1,000 of QBI from businesses you actively participate in.
- QBI is your net business profit, so unclaimed expenses inflate it, while employee wages never count.
What is the QBI deduction?
Since 2018, C corporations have paid a flat 21% federal rate. To give a similar break to smaller, non-corporate businesses, Congress created the qualified business income deduction under Section 199A. It started as a temporary rule, and the 2025 tax law (the One Big Beautiful Bill Act) made it permanent.
The deduction doesn’t require you to spend anything or itemize. You take it on top of the standard deduction or itemized deductions, after figuring your adjusted gross income. It lowers income tax only; your self-employment tax is still based on full net profit.
Keep clean expense records for your QBI deduction with the Manage Receipt app.
Who qualifies
| Who | Qualifies? |
|---|---|
| Freelancers and sole proprietors (Schedule C) | Yes |
| Single-member LLC owners taxed as sole proprietors | Yes |
| Partners and S corporation shareholders (via Schedule K-1) | Yes |
| Owners of some rental real estate run as a business | Sometimes |
| W-2 employees, on their wages | No |
| C corporations and their shareholders | No |
The business must be a US trade or business. Items that are not QBI include wages, capital gains and losses, most interest and dividends, guaranteed payments from a partnership and reasonable compensation paid to an S corporation owner.
How the QBI deduction is calculated
If your taxable income is under the 2026 threshold ($201,750 single, $403,500 married filing jointly), the math is simple. Your deduction is the smaller of:
- 20% of your QBI, or
- 20% of your taxable income before the QBI deduction, minus net capital gain.
QBI is your business profit after deductions that relate to the business, including the deductible half of SE tax and, if you have them, self-employed health insurance and retirement plan contributions.
Priya is a single freelance graphic designer with $70,000 of 2026 net profit on Schedule C and no other income. She takes the 2026 standard deduction of $16,100.
- SE tax: $70,000 × 92.35% × 15.3% = $9,890.69, so half is $4,945.35
- QBI: $70,000 − $4,945.35 = $65,054.65; 20% = $13,010.93
- Taxable income before QBI: $70,000 − $4,945.35 − $16,100 = $48,954.65; 20% = $9,790.93
- QBI deduction (the smaller): $9,790.93
- Final taxable income: $48,954.65 − $9,790.93 = $39,163.72
Here the taxable income limit, not the 20% of QBI, sets the deduction. That’s common for freelancers whose business is their only income.
Limits
Never more than 20% of taxable income before the deduction, minus net capital gain.
Above $201,750 ($403,500 joint) in 2026, a W-2 wages and property test phases in, fully by $276,750 ($553,500).
For specified service trades such as health, law, accounting and consulting, the deduction phases out over the same range.
The 2025 law widened these phase-in ranges to $75,000 ($150,000 joint) and added a minimum deduction of $400, starting with 2026, for taxpayers with at least $1,000 of QBI from businesses they materially participate in. Most freelancers below the threshold can use the simpler Form 8995; others use Form 8995-A.
Records needed
- Income records for every business: invoices, 1099s, payment platform reports
- Receipts for each expense on Schedule C, since QBI is built on net profit
- Schedule K-1s for partnership or S corporation income
- Self-employed health insurance and retirement contribution statements
- Prior-year Form 8995 or 8995-A if you have a carried-forward business loss
One counterintuitive point: a forgotten expense raises QBI and slightly raises the QBI deduction, but it raises taxable income and estimated tax far more. Claiming every legitimate expense always leaves you better off.
Clean expense records, correct QBI
Your QBI deduction is only as accurate as the profit figure behind it. Manage Receipt scans and categorizes business receipts all year and produces an AI tax report of deductible expenses by category, so your preparer starts from a profit number you can back up with receipts.
Explore AI Tax ReportsFrequently asked questions
Who qualifies for QBI?
Owners of sole proprietorships, single-member LLCs, partnerships and S corporations, plus some trusts and estates, with income from a qualified US trade or business. W-2 wages, C corporation income, capital gains and most investment income don’t qualify. Higher earners face extra limits above the 2026 threshold of $201,750 single or $403,500 joint.
Do freelancers get QBI?
Yes. Freelancers and independent contractors who file Schedule C usually qualify for a deduction of up to 20% of their net business profit, limited to 20% of taxable income. Freelancers in specified service fields such as consulting or accounting can lose it only at higher incomes, above the phase-in range.
Does the QBI deduction reduce self-employment tax?
No. The QBI deduction reduces taxable income for income tax only. Self-employment tax is still calculated on your full net profit from Schedule C. To lower SE tax, you need documented business expenses that reduce that profit, such as software, equipment, travel and the home office deduction.
Is the QBI deduction permanent?
Yes. The QBI deduction was originally set to expire after 2025, but the 2025 tax law made it permanent. It also widened the phase-in ranges and added a $400 minimum deduction, starting in 2026, for taxpayers with at least $1,000 of active QBI.
Where do I claim the QBI deduction?
On your Form 1040, using Form 8995 or Form 8995-A to figure the amount. Most freelancers with taxable income at or below the 2026 threshold can use the simpler Form 8995. It’s taken after adjusted gross income and on top of the standard or itemized deduction, not on Schedule C.