QBI Phase-Out Rules: Thresholds, SSTBs, and W-2 Wages

The QBI phase-out rules reduce, and can eliminate, the 20% deduction for pass-through business owners once taxable income climbs past a set threshold. Starting in 2026, the phase-out stretches across $75,000 of income above the threshold for single filers and $150,000 for joint filers, thanks to the One Big Beautiful Bill Act. What happens inside that range depends on three things: whether your business is a “specified service” trade or business, how much you pay in W-2 wages, and how much depreciable property you own.¹

Where the Phase-Out Begins

The trigger is your total taxable income before the QBI deduction, not your business income alone. Below the threshold, you get the full 20% deduction with no wage or property limitations. The base statutory threshold is $157,500 for single filers and $315,000 for joint filers, adjusted for inflation each year. For 2025 those figures came in at $197,300 and $394,600.² The 2026 numbers will be slightly higher after the inflation adjustment in Revenue Procedure 2025-32.

Cross the threshold and you enter the phase-out range. Under the rules that take effect for tax years beginning after December 31, 2025, that range runs $75,000 above the threshold for singles and $150,000 for joint filers, wider than the $50,000 and $100,000 ranges under prior law.¹ Using 2025 figures as a reference, joint filers would see the full limitations bite around $544,600, and single filers around $272,300. The 2017 sunset that would have killed Section 199A after 2025 is gone; the deduction is now permanent.

One ceiling applies at every income level: the deduction cannot exceed 20% of your taxable income minus net capital gains.³

How the Phase-Out Works for Non-Service Businesses

If your business is not a specified service trade or business, moving past the threshold introduces a wage-and-property test that didn’t apply before. Your deduction becomes the lesser of 20% of your QBI or the greater of two amounts:

50% of the W-2 wages your business paid during the year, or
25% of W-2 wages plus 2.5% of the unadjusted basis immediately after acquisition (UBIA) of your qualified depreciable property.³

Inside the phase-out range, only part of that limit applies. You calculate the gap between your tentative 20% deduction and the wage-and-property limit, then multiply the gap by a reduction factor equal to your income above the threshold divided by $75,000 (single) or $150,000 (joint). That product is what gets stripped from your deduction.

Say you file jointly with $200,000 of QBI, and your taxable income sits $75,000 above the threshold, halfway through the range. Your tentative deduction is $40,000. Your wage-and-property limit works out to $30,000. The gap is $10,000, and your reduction factor is 50%, so $5,000 comes off. You end up with a $35,000 deduction. Push all the way to the top of the range and the entire $10,000 gap disappears, leaving the $30,000 limit in full.

How the Phase-Out Works for Specified Service Businesses

SSTBs face a steeper mechanic. Below the threshold, they get the full deduction like anyone else. Inside the phase-out range, the rules cut into the QBI, W-2 wages, and UBIA themselves, using an “applicable percentage” equal to 100% minus the ratio of income above the threshold to $75,000 (single) or $150,000 (joint).¹

A single-filing attorney whose taxable income runs $50,000 above the threshold has an applicable percentage of about 33% (100% minus $50,000 ÷ $75,000). Only 33% of that attorney’s QBI, W-2 wages, and UBIA feeds into the calculation. At $75,000 above the threshold, the applicable percentage is zero. The deduction vanishes. That cliff is the reason income management matters so much for owners of service businesses.

Which Businesses Are SSTBs

The statute names them: health care, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, and brokerage services. Engineering and architecture were deliberately left off during the original 2017 drafting, even though they’re professional service fields.³

There’s also a catch-all for any business whose principal asset is the reputation or skill of one or more owners or employees. Treasury regulations narrowed this to income from endorsement deals, licensing a person’s name or image, and appearance fees.⁴ A skilled consultant or well-known restaurateur isn’t automatically pulled in just because the business depends on personal expertise.

A business with a small amount of service revenue isn’t necessarily an SSTB. Under the Treasury’s de minimis rule, a business with $25 million or less in gross receipts avoids SSTB classification if less than 10% of those receipts come from specified service activities. For businesses above $25 million in receipts, the cutoff is 5%. Cross either line and the entire business is treated as an SSTB, not just the service slice. It’s a cliff, not a gradient, so revenue mix needs tracking if you’re anywhere close.

One boundary worth noting: rental real estate isn’t an SSTB. Even above the phase-out range, a qualifying rental activity’s deduction is capped by the wage-and-property limits, not eliminated.⁵

What Counts as W-2 Wages and UBIA

The wage-and-property inputs only matter once you’re across the threshold, but they matter a lot at that point. W-2 wages include more than base salary; elective deferrals like 401(k) contributions, Section 457 deferred compensation, and designated Roth contributions all count.⁶ A sole proprietor with no employees has zero W-2 wages for this purpose, so the 50%-of-wages test produces nothing and only the 25%-plus-2.5% alternative can help.

UBIA is the original cost basis of depreciable property when first placed in service, before any depreciation. Land doesn’t count. Property stays in the UBIA pool for the longer of 10 years after being placed in service or the end of its full recovery period. A 7-year piece of equipment stays for 10 years; a 39-year commercial building stays for 39. An anti-abuse rule blocks property acquired within 60 days of year-end and disposed of within 120 days of purchase if the point was inflating the deduction.⁷

Planning Moves Near the Thresholds

If you own multiple businesses, aggregation is the most useful lever inside the phase-out range. You can pool QBI, W-2 wages, and UBIA across the group for the wage-and-property test, letting a profitable but light-payroll business borrow capacity from a related one with more employees or property. Aggregation requires common ownership of at least 50% of each business plus at least two of three operational connections: products or services commonly offered together, shared facilities or centralized business elements, or coordinated operation. The election gets reported each year on Schedule B of Form 8995-A. Skip the disclosure and the IRS can treat the businesses as separate.² One hard limit: you can’t aggregate an SSTB with a non-SSTB to slide around the service-business rules.³

For SSTB owners, keeping taxable income below the top of the phase-out range is worth real money because every dollar past the top means zero QBI deduction on service business income. Retirement contributions are the most direct tool. A SEP-IRA, solo 401(k), or defined benefit plan reduces taxable income dollar-for-dollar. A solo 401(k) can absorb combined employee and employer contributions well into six figures for high earners; a defined benefit plan can shelter more. The aim is either to get back below the threshold or land deeper in the range where the applicable percentage still leaves something on the table.

Charitable giving does similar work. Bunching multiple years of donations into one year through a donor-advised fund pulls taxable income down in the giving year while spreading the philanthropic effect over time. The charitable deduction reduces taxable income for threshold purposes without changing QBI, which makes it cleaner than income deferral, which shifts the QBI number too.

Timing income and deductible expenses across tax years can also shift meaningful QBI dollars, especially for cash-basis businesses with some control over billing and payment.

Filing and Classification Risk

Anyone inside or above the phase-out range files Form 8995-A rather than the simplified Form 8995. Schedule A handles SSTB calculations, Schedule B covers aggregation elections, and Schedule D deals with agricultural cooperative patrons.⁸ The deduction is computed business by business before amounts are combined, so each activity needs its own numbers.

Getting the classification right matters more than optimizing the numbers. The IRS applies a lower trigger for accuracy-related penalties on returns claiming the QBI deduction: the substantial understatement penalty kicks in at 5% of the correct tax rather than the usual 10%.⁹ The penalty is 20% of the underpayment, and 40% for gross valuation misstatements.¹⁰ Reporting a consulting practice as a non-service business to claim a deduction you weren’t entitled to is exactly the kind of understatement that gets there.

1
Office of the Law Revision Counsel. 26 U.S. Code 199A – Qualified Business Income
2
Internal Revenue Service. 2025 Instructions for Form 8995-A
3
Office of the Law Revision Counsel. 26 U.S.C. 199A – Qualified Business Income
4
eCFR. 26 CFR 1.199A-5 – Specified Service Trades or Businesses and the Trade or Business of Performing Services as an Employee
5
Internal Revenue Service. IRS Finalizes Safe Harbor to Allow Rental Real Estate to Qualify as a Business for Qualified Business Income Deduction
6
Internal Revenue Service. Revenue Procedure 2019-11 – Determination of W-2 Wages
7
eCFR. 26 CFR 1.199A-2 – Determination of W-2 Wages and Unadjusted Basis Immediately After Acquisition of Qualified Property
8
Internal Revenue Service. Instructions for Form 8995-A
9
Internal Revenue Service. Accuracy-Related Penalty
10
Office of the Law Revision Counsel. 26 U.S. Code 6662 – Imposition of Accuracy-Related Penalty on Underpayments