The QBI Deduction and the Two Things That Happen at the Threshold
Below a taxable-income threshold the deduction is simply 20% of qualified business income. Cross it and one of two different limits phases in over the next band of income — a ceiling built from W-2 wages and property for an ordinary business, or, for a specified service business, the income itself draining away to nothing. Same threshold, same band, very different damage.
Model scope
- Tax year
- No year selected - opens on 2024 worksheet defaults
- Supported situations
- One business, including the wage/property limitation and service-business phase-out. Threshold and phase-in range are editable; defaults are $191,950 and $50,000, not an automatically selected current year.
- Exclusions
- Business aggregation, losses netted across businesses, qualified REIT dividends, publicly traded partnership income, and a complete annual return calculation.
- Last scope review
- — checked against the model and its documentation; not a tax-law update.
The source rules 26 U.S.C. §199A(a), (b), (d) and (e), full text — optional
26 U.S.C. §199A(a) — Allowance of deduction
(a) Allowance of deduction In the case of a taxpayer other than a corporation, except as provided in subsection (i), there shall be allowed as a deduction for any taxable year an amount equal to the lesser of—
(1) the combined qualified business income amount of the taxpayer, or
(2) an amount equal to 20 percent of the excess (if any) of—
(A) the taxable income of the taxpayer for the taxable year, over
(B) the net capital gain (as defined in section 1(h)) of the taxpayer for such taxable year.
26 U.S.C. §199A(b) — Combined qualified business income amount
(b) Combined qualified business income amount For purposes of this section—
(1) In general The term “combined qualified business income amount” means, with respect to any taxable year, an amount equal to—
(A) the sum of the amounts determined under paragraph (2) for each qualified trade or business carried on by the taxpayer, plus
(B) 20 percent of the aggregate amount of the qualified REIT dividends and qualified publicly traded partnership income of the taxpayer for the taxable year.
(2) Determination of deductible amount for each trade or business The amount determined under this paragraph with respect to any qualified trade or business is the lesser of—
(A) 20 percent of the taxpayer’s qualified business income with respect to the qualified trade or business, or
(B) the greater of—
(i) 50 percent of the W–2 wages with respect to the qualified trade or business, or
(ii) the sum of 25 percent of the W–2 wages with respect to the qualified trade or business, plus 2.5 percent of the unadjusted basis immediately after acquisition of all qualified property.
(3) Modifications to limit based on taxable income
(A) Exception from limit In the case of any taxpayer whose taxable income for the taxable year does not exceed the threshold amount, paragraph (2) shall be applied without regard to subparagraph (B).
(B) Phase-in of limit for certain taxpayers
(i) In general If—
(I) the taxable income of a taxpayer for any taxable year exceeds the threshold amount, but does not exceed the sum of the threshold amount plus $75,000 ($150,000 in the case of a joint return), and
(II) the amount determined under paragraph (2)(B) (determined without regard to this subparagraph) with respect to any qualified trade or business carried on by the taxpayer is less than the amount determined under paragraph (2)(A) with respect such trade or business,
(ii) Amount of reduction The amount determined under this subparagraph is the amount which bears the same ratio to the excess amount as—
(I) the amount by which the taxpayer’s taxable income for the taxable year exceeds the threshold amount, bears to
(II) $75,000 ($150,000 in the case of a joint return).
(iii) Excess amount For purposes of clause (ii), the excess amount is the excess of—
(I) the amount determined under paragraph (2)(A) (determined without regard to this paragraph), over
(II) the amount determined under paragraph (2)(B) (determined without regard to this paragraph).
(4) Wages, etc.
(A) In general The term “W–2 wages” means, with respect to any person for any taxable year of such person, the amounts described in paragraphs (3) and (8) of section 6051(a) paid by such person with respect to employment of employees by such person during the calendar year ending during such taxable year.
(B) Limitation to wages attributable to qualified business income Such term shall not include any amount which is not properly allocable to qualified business income for purposes of subsection (c)(1).
(C) Return requirement Such term shall not include any amount which is not properly included in a return filed with the Social Security Administration
(5) Acquisitions, dispositions, and short taxable years The Secretary shall provide for the application of this subsection in cases of a short taxable year or where the taxpayer acquires, or disposes of, the major portion of a trade or business or the major portion of a separate unit of a trade or business during the taxable year.
(6) Qualified property For purposes of this section:
(A) In general The term “qualified property” means, with respect to any qualified trade or business for a taxable year, tangible property of a character subject to the allowance for depreciation under section 167—
(i) which is held by, and available for use in, the qualified trade or business at the close of the taxable year,
(ii) which is used at any point during the taxable year in the production of qualified business income, and
(iii) the depreciable period for which has not ended before the close of the taxable year.
(B) Depreciable period The term “depreciable period” means, with respect to qualified property of a taxpayer, the period beginning on the date the property was first placed in service by the taxpayer and ending on the later of—
(i) the date that is 10 years after such date, or
(ii) the last day of the last full year in the applicable recovery period that would apply to the property under section 168 (determined without regard to subsection (g) thereof).
(7) Special rule with respect to income received from cooperatives In the case of any qualified trade or business of a patron of a specified agricultural or horticultural cooperative, the amount determined under paragraph (2) with respect to such trade or business shall be reduced by the lesser of—
(A) 9 percent of so much of the qualified business income with respect to such trade or business as is properly allocable to qualified payments received from such cooperative, or
(B) 50 percent of so much of the W–2 wages with respect to such trade or business as are so allocable.
26 U.S.C. §199A(d) — Qualified trade or business
(d) Qualified trade or business For purposes of this section—
(1) In general The term “qualified trade or business” means any trade or business other than—
(A) a specified service trade or business, or
(B) the trade or business of performing services as an employee.
(2) Specified service trade or business The term “specified service trade or business” means any trade or business—
(A) which is described in section 1202(e)(3)(A) (applied without regard to the words “engineering, architecture,”) or which would be so described if the term “employees or owners” were substituted for “employees” therein, or
(B) which involves the performance of services that consist of investing and investment management, trading, or dealing in securities (as defined in section 475(c)(2)), partnership interests, or commodities (as defined in section 475(e)(2)).
(3) Exception for specified service businesses based on taxpayer’s income
(A) In general If, for any taxable year, the taxable income of any taxpayer is less than the sum of the threshold amount plus $75,000 ($150,000 in the case of a joint return), then—
(i) any specified service trade or business of the taxpayer shall not fail to be treated as a qualified trade or business due to paragraph (1)(A), but
(ii) only the applicable percentage of qualified items of income, gain, deduction, or loss, and the W–2 wages and the unadjusted basis immediately after acquisition of qualified property, of the taxpayer allocable to such specified service trade or business shall be taken into account in computing the qualified business income, W–2 wages, and the unadjusted basis immediately after acquisition of qualified property of the taxpayer for the taxable year for purposes of applying this section.
(B) Applicable percentage For purposes of subparagraph (A), the term “applicable percentage” means, with respect to any taxable year, 100 percent reduced (not below zero) by the percentage equal to the ratio of—
(i) the taxable income of the taxpayer for the taxable year in excess of the threshold amount, bears to
(ii) $75,000 ($150,000 in the case of a joint return).
26 U.S.C. §199A(e) — Other definitions
(e) Other definitions For purposes of this section—
(1) Taxable income Except as otherwise provided in subsection (g)(2)(B), taxable income shall be computed without regard to section 68 and without regard to any deduction allowable under this section.
(2) Threshold amount
(A) In general The term “threshold amount” means $157,500 (200 percent of such amount in the case of a joint return).
(B) Inflation adjustment In the case of any taxable year beginning after 2018, the dollar amount in subparagraph (A) shall be increased by an amount equal to—
(i) such dollar amount, multiplied by
(ii) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting “calendar year 2017” for “calendar year 2016” in subparagraph (A)(ii) thereof.
(3) Qualified REIT dividend The term “qualified REIT dividend” means any dividend from a real estate investment trust received during the taxable year which—
(A) is not a capital gain dividend, as defined in section 857(b)(3), and
(B) is not qualified dividend income, as defined in section 1(h)(11).
(4) Qualified publicly traded partnership income The term “qualified publicly traded partnership income” means, with respect to any qualified trade or business of a taxpayer, the sum of—
(A) the net amount of such taxpayer’s allocable share of each qualified item of income, gain, deduction, and loss (as defined in subsection (c)(3) and determined after the application of subsection (c)(4)) from a publicly traded partnership (as defined in section 7704(a)) [2] which is not treated as a corporation under section 7704(c), plus
(B) any gain recognized by such taxpayer upon disposition of its interest in such partnership to the extent such gain is treated as an amount realized from the sale or exchange of property other than a capital asset under section 751(a).
Verify before relying on this. Retrieved 29 September 2026. Tax law changes; confirm against the primary source above before using it in class or in practice. Nothing here is tax advice.
What would change this
The deduction as taxable income rises
20% of your QBI, and where it went
Educational simulation, not tax advice. No tax year is selected: the threshold and the phase-in range are inputs rather than a fixed tax year, so the figures must be checked for the year being tested. They open on the 2024 single-filer amounts the source worksheet uses, $191,950 and $50,000. §199A(b)(3)(B) and (d)(3) now read $75,000 ($150,000 joint), so for a current year set the range slider accordingly; the threshold itself is inflation adjusted each year under §199A(e)(2)(B). One trade or business only: no aggregation, no netting of a loss against another business, and no qualified REIT dividends or publicly traded partnership income, which get 20% under §199A(b)(1)(B) with no wage limit at all. Source model: ACCTG 410 Individual Taxation Toolbox, “QBI deduction” and “20% deduc not SSTB” tabs, with the corrections noted in the tool documentation.
The computation, line by line
Each line with its authority. The line that takes the most is marked as the limit.
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Workpaper
A plain-text record of the facts, computation, authority and result. Copy it into your file or print it.