The QBI Deduction: How Business Owners Leave 20% on the Table

The Section 199A deduction lets pass-through owners deduct up to 20% of qualified business income (QBI). On $400,000 of QBI, that is an $80,000 deduction, and most owners who lose it lose it to their own income level, entity structure, or payroll choices.

What Section 199A Does, and Who Can Claim It

The deduction is available to sole proprietors, S-corps, partnerships, and certain limited liability companies (LLCs). It applies cleanly to businesses that are not "specified service trades or businesses" (SSTBs), a defined list that includes health, law, accounting, consulting, financial services, and businesses whose principal asset is the skill or reputation of their owners. The July 2025 tax law made the deduction permanent at 20%.

The 2026 thresholds are based on taxable income: the phase-in starts at $201,750 single / $403,500 married filing jointly and ends at $276,750 / $553,500. Below the lower number, SSTB owners qualify for the full deduction. Above the upper number, it is gone entirely. In between, it phases out ratably. Non-SSTB owners keep the deduction above the range, but it becomes subject to limits tied to W-2 wages paid and the unadjusted basis of qualified property (UBIA).

Those limits are the piece most owners miss. Once your income clears the lower threshold, your deduction is capped at either 50% of W-2 wages paid by the business, or 25% of W-2 wages plus 2.5% of UBIA, whichever is greater. A profitable sole proprietorship or partnership with no payroll and few fixed assets can hold a deduction worth almost nothing above the range. In an S-corp, the owner's own salary counts as W-2 wages, which is why the entity lever below matters.

The Planning Levers That Move the Number

Three levers do most of the work.

Retirement-plan contributions. The thresholds are measured against taxable income. A simplified employee pension individual retirement account (SEP-IRA), Solo 401(k), or defined benefit contribution lowers taxable income, which can pull you back below a phase-out threshold. Contributions attributable to the business can also trim QBI itself, so the net effect needs modeling. A $72,000 Solo 401(k) contribution (the 2026 total limit before catch-ups) in the right year can mean keeping a deduction you would otherwise lose.

Entity structure. An LLC taxed as a sole proprietor with strong profits and no payroll is exposed to the W-2 wage limitation. An S-corp election, sized with a reasonable salary, creates W-2 wages that can support a larger deduction. Payroll taxes and overhead mean it does not always pencil out, but it often does, and most owners have never run it.

Income timing. Accelerating deductible expenses, deferring a year-end invoice, or timing a bonus can shift taxable income across a threshold. This is where tax planning before the year ends earns its keep, because decisions made in November shape a deduction claimed in April.

The Takeaway

Your answer turns on where your projected taxable income lands relative to the phase-out range. Two SSTB owners on either side of the upper threshold can run identical businesses and end up with very different deductions.

The expensive version comes from owners who do everything right at the return level and still lose the deduction because nobody looked at the number until the books closed. By April the contribution is capped, the invoice recognized, the S-corp election a year too late.

If your income is anywhere within reach of a threshold this year, that is worth a conversation before you close the books.

The information provided is for educational purposes only and does not constitute investment, legal, or tax advice. Consult with qualified professionals for guidance specific to your situation.