The qualified business income (QBI) deduction, in section 199A of the tax code, lets owners of sole proprietorships, partnerships, S corporations and some trusts deduct up to 20% of their qualified business income. It started in 2018 and was due to expire after 2025, but the July 2025 federal tax law (Public Law 119-21) made it permanent. Below an income threshold, most owners qualify with few conditions. Above it, the type of business and the wages it pays start to matter a great deal.
What counts as qualified business income?
QBI is the ordinary net profit from a qualified trade or business in the United States, flowing through to you. Some things are specifically left out:
- Your own pay. Wages an S corporation pays you, and guaranteed payments a partnership pays you for services, are not QBI.
- Investment income. Capital gains, most dividends and interest not tied to the business are excluded.
- Income earned as an employee. A W-2 job is not a qualified business, even if you could do the same work as a contractor.
The deduction is also capped at 20% of your taxable income minus net capital gains, so a household with large capital gains can hit that ceiling before the business limits apply.
Where do the income limits start in 2026?
For 2026, the special limits begin above $201,775 of taxable income for single filers and $403,500 for married couples filing jointly (IRS, Rev. Proc. 2025-32, October 2025). They phase in over the next $75,000 for single filers and $150,000 for joint filers, a wider range than before 2026 because of the 2025 law. Below the threshold, the 20% generally applies without the wage or business-type tests.
Below the threshold, the deduction is simple. Above it, the business has to earn it.
What happens above the threshold?
Two tests kick in.
The wage and property test. The deduction for each business is limited to the greater of 50% of the W-2 wages it pays, or 25% of those wages plus 2.5% of the original cost of its qualified property. A profitable business with few employees and little equipment can find its deduction squeezed. For an S corporation owner, the salary the business pays you counts as W-2 wages, which is one reason the reasonable salary question and the QBI question are really the same question.
The professional service test. A "specified service trade or business" is one in fields such as health, law, accounting, consulting, financial services, athletics, performing arts, or any business whose main asset is the skill or reputation of its owners or employees. Above the phase-in range, owners of these businesses lose the deduction entirely. Within the range, it shrinks gradually. Engineering and architecture are specifically not on the list.
Is there a minimum deduction?
Starting in 2026, the 2025 law adds a minimum deduction of $400 for taxpayers with at least $1,000 of combined QBI from businesses in which they materially participate. Material participation uses the same test as the passive activity rules in section 469(h). Both amounts are indexed for inflation after 2026 (IRS, Rev. Proc. 2025-32, October 2025; Internal Revenue Code section 199A(i)). It is small, but it means a modest side business still produces some deduction.
Does Utah allow the QBI deduction?
The QBI deduction is taken after adjusted gross income on the federal return. Utah's income tax starts from federal adjusted gross income, so the QBI deduction does not reduce Utah taxable income. Utah's list of additions and subtractions from federal adjusted gross income has no QBI-style deduction (Utah Code sections 59-10-103 and 59-10-114, current as of October 2026). The deduction is a federal benefit only.
What moves the number?
- Your salary. A higher S corporation salary reduces QBI but increases W-2 wages for the wage test.
- Retirement contributions. Employer contributions to a plan reduce business profit and so reduce QBI. Often the trade is still worth it.
- State entity tax. If the business elects into Utah's pass-through entity tax, that payment reduces QBI too.
- Taxable income overall. Deductions elsewhere on the return, such as a large charitable gift, can bring income back under the threshold, which can restore the full deduction.
- How businesses are grouped. Owners of several businesses can sometimes aggregate them for the wage test, under specific rules.
A hypothetical example
Hypothetical. A married consultant in Utah has taxable income just above the top of the 2026 phase-in range. Because consulting is a specified service business, the QBI deduction is gone at that income. If a combination of retirement contributions and timing of other income brought taxable income back inside the range, part of the deduction would return. Whether that is worth doing depends on what those moves cost and what else is happening that year, which is why it is a projection question rather than a filing question.
The deduction is generous, but the rules around it reward planning before the year ends. If you own a pass-through business and are near the thresholds, it is one of the things our CPA-led tax strategy work looks at each year.
Educational only. Not investment, tax, or legal advice. Every situation is different; the right answer depends on the numbers, and that's what the strategy session is for. Investing involves risk, including possible loss of principal.