What S Corp Owners Need to Know About the QBI Deduction

The Qualified Business Income (QBI) deduction offers considerable benefits to self-employed people and other small business owners. It lets you deduct up to 20% of the income you earn from your business, so it can help S Corp owners save on their taxes.

The deduction began in 2018. It was originally set to expire after 2025, but Congress made it permanent in 2025. It also changed the rules for 2026. This guide explains how the deduction works today and what it means for S Corp owners.

What Changed for 2026?

The One Big Beautiful Bill Act (OBBBA), signed in July 2025, made three changes that matter for 2026 returns:

• The deduction is now permanent. It no longer has an end date.
• The income phase-in ranges are wider. The range grows from $50,000 to $75,000 for single filers, and from $100,000 to $150,000 for joint filers. This means the limits on higher earners apply more gradually.
• There’s a new $400 minimum deduction. If you have at least $1,000 of QBI from a business where you actively work, you can claim at least $400. Both amounts are adjusted for inflation after 2026.

The income thresholds also rose with inflation. The table below shows the new numbers.

What Is the Qualified Business Income Deduction?

The QBI deduction lets you deduct up to 20% of qualified business income from your taxable income. It primarily applies to self-employed people and small business owners, including people who run S Corps.

For example, if you have $100,000 in qualified business income, you can deduct up to $20,000. That leaves $80,000 in taxable income from that source. The deduction reduces your income tax. It doesn’t reduce self-employment tax or payroll tax.

What Counts as Qualified Business Income?

The definition of qualified business income is fairly broad. According to the IRS, QBI is “the net amount of qualified items of income, gain, deduction, and loss from any qualified trade or business.”

Specific exclusions include:

• Items not properly includable in taxable income
• Capital gains and losses
• Interest income that isn’t allocable to a trade or business
• Wage income
• Income that isn’t effectively connected with the conduct of business within the U.S.
• Commodities or forex gains and losses
• Certain dividends
• Annuities
• Reasonable compensation from an S Corp
• Guaranteed payments from partnerships
• Qualified REIT dividends

For most people who run a company in the United States, QBI is close to the business’s net profit. It’s calculated after business deductions, such as the employer’s share of payroll tax, self-employed health insurance, and retirement plan contributions.

Reasonable compensation is excluded from QBI. For S Corp owners, that’s the salary you pay yourself. If your business makes $120,000 and you pay yourself a $60,000 salary, the deduction is based on the remaining $60,000. That works out to a deduction of up to $12,000, before the other adjustments above.

Other Requirements for the QBI Deduction

Your taxable income decides how much of the deduction you can claim. Taxable income here means your income after the standard deduction, before the QBI deduction itself.

Below the threshold, you can generally take the full 20% deduction. Your type of business doesn’t matter.

Above the threshold, limits phase in. Which limits apply depends on your business.

If you’re in a specified service business

A specified service trade or business (SSTB) loses the deduction gradually above the threshold. It goes away entirely at $276,750 for single filers and $553,500 for joint filers.

SSTBs include these fields:

• Health
• Law
• Accounting
• Actuarial science
• Performing arts
• Consulting
• Athletics
• Financial services
• Brokerage services
• Investing and investment management
• Trading

The IRS also treats a business as an SSTB when its “principal asset” is the reputation or skill of its owners and the income comes from endorsements, the use of someone’s image or likeness, or appearances at events and in media. If you earn money like a celebrity through endorsements or appearance fees, you may lose the deduction above the threshold.

Many consultants, healthcare practitioners, and other SSTB owners are below the threshold, so their business type doesn’t matter yet.

If you’re not in a specified service business

Above the threshold, your deduction can be limited by the W-2 wages your business pays. S Corp owners have an edge here, because the salary you pay yourself counts as W-2 wages. The limit is generally the greater of 50% of W-2 wages, or 25% of W-2 wages plus 2.5% of the business’s qualified property.

The overall cap

You can only deduct up to 20% of your taxable income (minus net capital gain), even if your QBI is higher. You don’t need to itemize. You can take the QBI deduction on top of the standard deduction, which is $16,100 for single filers and $32,200 for joint filers in 2026.

Why It Matters to S Corp Owners

The QBI deduction is one of the things that make S Corps an effective way to save money. S Corp owners can benefit in two ways.

First, you save on payroll taxes by taking part of your income as distributions instead of salary. Second, you may deduct up to 20% of the qualifying part of that income.

Here’s an example for a single filer in 2026. Your business earns $140,000 in profit before you pay yourself. You pay yourself a $90,000 salary and take the rest as a distribution.

Payroll tax savings. As a sole proprietor, you’d owe about $19,780 in self-employment tax on $140,000 of profit. As an S Corp, you owe about $13,770 in payroll tax on the $90,000 salary. That’s a saving of about $6,000.

QBI deduction. Your business also pays the employer’s share of payroll tax on your salary, about $6,885. That leaves $43,115 of qualified business income. The deduction is 20% of that.

With a $90,000 salary plus $43,115 of business income, minus the $16,100 standard deduction, your taxable income is about $117,000 before the QBI deduction. That’s in the 24% bracket for 2026, which covers single filers with taxable income from $105,701 to $201,775. At that rate, the $8,623 deduction saves about $2,070 in income tax.

Together, the payroll tax savings and the QBI deduction come to about $8,100 in this example. The figures are simplified. They assume a single filer with no other income, and your own numbers will vary.

The more your business earns and the more you take as distributions, the more the QBI deduction can help. Salary still has to be reasonable, so the savings don’t come from skipping it.

Final Word

The QBI deduction helps S Corp owners and other self-employed people deduct up to 20% of their qualified business income from their income taxes. Congress made it permanent, widened the phase-in ranges for 2026, and added a $400 minimum. Most S Corp owners with taxable income below the threshold qualify.

If your income is near or above the threshold, the rules get more complex. Check the thresholds each year, since they adjust for inflation, and talk to a tax professional about your situation.

This content is for educational purposes only and does not constitute legal, financial, or tax advice.