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QBI deduction (20% pass-through, Sec. 199A)
Permanent since 2025· Tax rule
Law or rule (2026)Set by statute, regulation or the agency; numbers change yearly.
A federal deduction of up to 20% of qualified business income from pass-throughs: LLCs, partnerships, S corporations and sole proprietorships.
See it on the Personal Finance & Estate map →How it works
Owners deduct up to 20% of their share of business profit, plus 20% of REIT dividends. Above roughly $200,000 of taxable income (single) or $400,000 (joint) in 2026, limits phase in: the deduction is capped at the greater of 50% of W-2 wages paid or 25% of wages plus 2.5% of the cost of depreciable property, and most professional-service firms phase out. Rental real estate counts only if it rises to a business. California does not allow it. Ask a CPA whether a rental qualifies.
Why it matters for you
It cuts the top federal rate on qualifying pass-through income from 37% to about 29.6%, a counterpart to the 2017 corporate tax cut.
Rules, limits and sources (2026)
IRC Sec. 199A and Treasury's 2019 final regulations; claimed on Form 8995 or 8995-A. Rev. Proc. 2019-38 sets a 250-hour safe harbor for rentals. The 2025 OBBBA made it permanent.
Watch out for
Whether a triple-net lease or a single rental is a 'trade or business' is a facts-and-circumstances call decided case by case.
Connections (2)
▸QBI deduction (20% pass-through, Sec. 199A) cuts federal tax on pass-through income in Income tax (federal & California)Law or rule (2026)
How they connect
The QBI deduction reduces federal taxable income by up to 20% of pass-through business profit, so a top-bracket owner pays about 29.6% instead of 37% on it. It does not reduce adjusted gross income, and California, which does not conform, taxes the full amount.
When it applies
Enacted in the 2017 TCJA for 2018–2025 as a counterpart to the corporate rate cut to 21%; made permanent in July 2025.
The rule
IRC Sec. 199A; claimed on Form 8995 or 8995-A; Treasury's 2019 final regulations define qualifying income.
Watch out for
Economists debate whether it boosts investment or mainly benefits high earners; its complexity invites disputes over what counts as a business.
▸QBI deduction (20% pass-through, Sec. 199A) reduces tax on LLC & partnership taxation (Schedule K-1)Law or rule (2026)
How they connect
Partnerships and LLCs do not claim the QBI deduction themselves; they report each owner's share of qualified income, W-2 wages and property basis on the K-1 (Box 20, code Z). Owners then compute up to 20% on their own returns. Guaranteed payments do not qualify.
When it applies
Reported on Schedule K-1 since 2018; covers rental, operating-business and some REIT and publicly traded partnership income passed through to owners.
The rule
Treasury Reg. 1.199A-6 sets the reporting rules; Rev. Proc. 2019-38's 250-hour safe harbor helps rental partnerships qualify.
Watch out for
Whether a triple-net or single-tenant rental reported on a K-1 qualifies outside the safe harbor is debated and fact-specific.