“What is the 20% deduction, and do I get it?” If you run a trade business as a sole proprietor, a partnership, an LLC taxed as either, or an S corporation, and it made a profit, the answer is probably yes. The qualified business income deduction, section 199A of the tax code, lets an eligible owner deduct up to 20% of the business’s qualified profit. It has been available for tax years beginning after December 31, 2017, and a 2025 law kept it in place for good.
The IRS says the deduction is available “regardless of whether taxpayers itemize deductions on Schedule A or take the standard deduction.” Your tax software or preparer figures it, but it pays to know how it works, because two choices you make (how you pay yourself and whether you hire employees) change the number.
Who can take it
The IRS lists owners of sole proprietorships, partnerships and S corporations, and some trusts and estates. Two kinds of income never count: income earned through a C corporation, and pay for services as an employee. Partnerships and S corporations do not take the deduction themselves; they pass the figures to their owners on Schedule K-1, and each owner claims it on their own return.
The activity has to be a real trade or business. The Form 8995 instructions describe that as an activity whose primary purpose is income or profit, carried on “with continuity and regularity.” A contracting business that takes jobs all year qualifies; an occasional favor for a neighbor is a harder case.
What counts as qualified business income
Qualified business income is the net profit from the business, after a few adjustments. The IRS says it generally takes into account the deductible part of self-employment tax, the self-employed health insurance deduction and deductions for contributions to qualified retirement plans such as a SEP or SIMPLE, so those lower it. It does not include:
The deduction also has a ceiling: it cannot be more than 20% of your taxable income (figured before this deduction) minus net capital gain. For an owner whose only income is the business, that ceiling is often the one that applies, because the standard deduction lowers taxable income but not business income.
Say a fence installer files single and has qualified business income of $60,000 after those adjustments, and taxable income of $45,000 before this deduction once the standard deduction comes off. Twenty percent of the business income is $12,000; 20% of taxable income is $9,000. The deduction is the smaller figure, $9,000.
Why trade businesses are not “specified service” businesses
The law treats one group of businesses less generously: specified service trades or businesses. The Form 8995 instructions list them as businesses in health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, investing and investment management, and trading or dealing in securities, partnership interests or commodities. Construction and repair trades are not on the list.
There is also a catch-all for a business whose principal asset is “the reputation or skill” of its owners or employees. Every roofer has skill, but the instructions spell out this catch-all as three kinds of income: fees for endorsing products or services, fees for the use of your image, likeness, name or voice, and fees for appearing at events or in the media. Doing the work itself does not make a plumbing or electrical company a specified service business.
And below the income threshold in the next section, even a specified service business is treated as a qualified one. If you also earn money from a separate line in one of the listed fields, such as paid consulting, ask your preparer how that part is treated.
The income limits
Below a threshold, figured on taxable income before the deduction, the calculation is simple and you use Form 8995. Above it, a limit based on wages and property phases in over a range, and you use Form 8995-A. The amounts change each year with inflation:
| Tax year and filing status | Limit starts above | Fully applies above |
|---|---|---|
| 2025, married filing jointly | $394,600 | $494,600 |
| 2025, all other returns | $197,300 | $247,300 |
| 2026, married filing jointly | $403,500 | $553,500 |
| 2026, all other returns | $201,750 | $276,750 |
The 2025 figures come from the IRS instructions for Forms 8995 and 8995-A; the 2026 figures from Revenue Procedure 2025-32 (married filing separately has its own 2026 amounts there, $201,775 and $276,775). The range is wider in 2026 because of the 2025 law described below.
How wages and equipment change it at higher incomes
Above the threshold, the deduction for each business is held to the greater of two amounts: 50% of the W-2 wages the business paid, or 25% of those wages plus 2.5% of the unadjusted basis of its qualified property. Two definitions matter for contractors:
Say a remodeler and spouse file jointly with 2026 taxable income of $600,000 before the deduction, above the $553,500 top of the range, and the business has $450,000 of qualified business income. Twenty percent would be $90,000. If the business paid $150,000 in W-2 wages, half of that is $75,000, so the deduction is $75,000. If the same income came from a one-person shop using subcontractors, with $200,000 of trucks and equipment and no W-2 wages, the limit is 2.5% of $200,000: $5,000.
The S corporation salary
The IRS says an S corporation must pay a shareholder who works in the business reasonable compensation for those services before it makes non-wage distributions to them, and that salary is not qualified business income. So, below the threshold, the deduction is figured on the profit left after your salary.
Say an S corporation earns $120,000 before paying its owner, and the owner takes a $60,000 salary. The qualified business income is roughly the remaining $60,000, less the company’s share of payroll tax on the salary, so the deduction is under $12,000. As a sole proprietor with the same $120,000 profit, the starting point would be $120,000, less the deductible part of self-employment tax and the other adjustments. The payroll tax an S corporation can save is partly offset by a smaller deduction, which is one of the costs weighed in Should Your LLC Elect S Corporation Status? Above the threshold the salary cuts the other way: it counts as W-2 wages for the wage limit.
What the 2025 law changed
Public Law 119-21, signed July 4, 2025, made three changes in section 70105, for tax years beginning after December 31, 2025:
- It removed the end date. The deduction had been set to expire after 2025. The IRS says the new law “makes the qualified business income deduction permanent.”
- It widened the phase-in range from $50,000 to $75,000 ($100,000 to $150,000 on a joint return), which is why the 2026 range in the table is wider.
- It added a minimum deduction of $400 for a taxpayer with at least $1,000 of qualified business income from active businesses, meaning businesses in which the taxpayer materially participates. Both amounts are adjusted for inflation after 2026.
The minimum matters most in a thin year. Material participation under section 469 is not required for the regular deduction, the Form 8995 instructions say. It is required for the $400 minimum: the IRS’s deduction page says the owner must meet one of the material participation tests in Treasury Regulation section 1.469-5T(a)(1) through (7). An owner who has money in a business but does not work in it should check them.
Before you file
- Confirm which form applies: Form 8995 at or below the threshold, Form 8995-A above it.
- Remember this is a federal deduction. State income taxes have their own rules, so ask how your state treats it.
- If your qualified business income nets to a loss for the year, the Form 8995 instructions say you get no deduction (unless you have qualified REIT dividends or publicly traded partnership income), and the loss is carried forward into next year’s calculation.
- Remember the trade-off: a retirement contribution or health insurance deduction lowers your tax, and it also lowers the income the 20% is figured on. Both are still worth having; see Retirement for a Small Contractor.
- If you run an S corporation, keep the salary reasonable for the work; the deduction is no reason to pay yourself less than the job is worth.
- Count the deduction when you plan your quarterly estimated taxes, and keep your other deductions straight with What Can You Deduct?
General information, not legal or tax advice. Rules change and vary by state; check with the agency named above or a professional for your situation.