The Qualified Business Income (QBI) deduction just got a significant upgrade. Under the One Big Beautiful Bill Act (OBBBA), the QBI deduction rate increased from 20% to 23% for tax years beginning after December 31, 2025 — and it’s now permanent.
For freelancers, sole proprietors, and small business owners who operate as pass-through entities, this means a bigger deduction, more tax savings, and a stronger incentive to keep accurate records of every business expense. Here’s everything you need to know.
What Is the QBI Deduction?
The Qualified Business Income deduction (also called the Section 199A deduction or the pass-through deduction) allows eligible self-employed individuals and small business owners to deduct a percentage of their qualified business income from their personal taxable income.
Think of it as a discount on your tax rate. If you’re in the 24% tax bracket and claim the 23% QBI deduction, you effectively pay taxes on only 77% of your qualified business income — dropping your effective rate to about 18.5% on that income.
Quick History
- 2018-2025: The TCJA created the QBI deduction at 20%. It was scheduled to expire after December 31, 2025.
- 2026 onward: The OBBBA made the deduction permanent and increased the rate to 23%.
Who Qualifies for the QBI Deduction in 2026?
You may qualify if you earn business income through a pass-through entity:
- Sole proprietors (including freelancers filing Schedule C)
- Single-member LLCs (taxed as sole proprietorships)
- Partnerships and multi-member LLCs
- S-Corporations
- Trusts and estates with qualifying business income
C-Corporations do NOT qualify. C-Corp income is taxed at the corporate level, not on the owner’s personal return, so the QBI deduction doesn’t apply.
W-2 employees do NOT qualify for their salary income. However, if you have a side business (freelancing, consulting, rental income), the income from that business may qualify even if you’re also employed.
What Counts as “Qualified Business Income”?
QBI includes the net amount of qualified items of income, gain, deduction, and loss from any qualified trade or business. In simpler terms:
QBI = Business Revenue − Business Expenses
Items that ARE included:
- Ordinary business income (service fees, product sales, contract payments)
- Business deductions (supplies, software, travel, home office expenses, etc.)
- Self-employment tax deduction (the deductible half)
- Deductions for contributions to self-employed retirement plans
Items that are NOT included:
- Capital gains or losses
- Interest income (unless from a lending business)
- Dividend income
- W-2 wages
- Investment income
- Reasonable compensation paid to you by your S-Corp
How to Calculate Your QBI Deduction
The Basic Calculation
For most freelancers and small business owners under the income thresholds, the calculation is straightforward:
QBI Deduction = 23% × Qualified Business Income
But there’s a cap: your QBI deduction cannot exceed 23% of your taxable income (before the QBI deduction itself, minus net capital gains).
Example: Freelance Designer
| Item | Amount |
|---|---|
| Freelance revenue | $120,000 |
| Business expenses | −$20,000 |
| Net business income (QBI) | $100,000 |
| QBI deduction (23%) | $23,000 |
This $23,000 deduction comes directly off your taxable income. At a 24% marginal tax rate, that’s $5,520 in tax savings — just from this one provision.
Under the old 20% rate, the same freelancer would have gotten a $20,000 deduction and saved $4,800 in taxes. The OBBBA’s increase puts an extra $720 per year back in this freelancer’s pocket.
Income Thresholds and Phase-Outs
The QBI deduction has income limits that primarily affect higher-earning taxpayers in certain professions:
2026 Thresholds (Estimated, Inflation-Adjusted)
| Filing Status | Full Deduction Below | Phase-Out Range | Fully Phased Out Above |
|---|---|---|---|
| Single / HoH | ~$191,950 | $191,950 – $266,950 | ~$266,950 |
| Married Filing Jointly | ~$383,900 | $383,900 – $558,900 | ~$558,900 |
Note: The OBBBA widened the phase-in range from $50,000 to $75,000 for single filers and from $100,000 to $175,000 for joint filers.
Below the Threshold
If your taxable income is below the threshold, you get the full 23% deduction regardless of your business type. Simple.
Above the Threshold: The SSTB Rules
If your income exceeds the thresholds and your business is a Specified Service Trade or Business (SSTB), the deduction begins phasing out and may eventually be eliminated entirely.
SSTBs include:
- Health, law, accounting, actuarial science, performing arts, consulting
- Athletics, financial services, brokerage services
- Any business where the principal asset is the reputation or skill of employees/owners
If your business is NOT an SSTB (e.g., manufacturing, retail, construction, real estate), the W-2 wages/capital limitation applies instead — your QBI deduction is limited to the greater of: (a) 50% of W-2 wages paid, or (b) 25% of W-2 wages plus 2.5% of the unadjusted basis of qualified property.
Between the Thresholds
If you’re in the phase-out range, a partial deduction is available. The calculation is more complex — this is where working with a tax professional pays off.
The New $400 Minimum Deduction
One of the OBBBA’s additions to the QBI rules is a minimum deduction of $400 for taxpayers who have at least $1,000 of qualified business income from one or more active trades or businesses in which they materially participate.
This benefits lower-income freelancers and those in the phase-out range — ensuring that everyone with meaningful business income gets at least some QBI benefit.
5 Strategies to Maximize Your QBI Deduction
1. Track Every Legitimate Business Expense
Your QBI is calculated from your net business income. While business deductions reduce your QBI base, they also reduce your overall taxable income — which is almost always a bigger benefit. The real danger is missing deductions entirely because you lost the receipts.
An AI receipt scanner ensures every expense is captured. A $200 business dinner receipt that gets lost in your wallet is $200 in missed deductions — worth roughly $86 in combined income tax and self-employment tax savings for someone in the 22% bracket, plus the QBI effect.
2. Consider S-Corp Election
If you’re a higher-earning freelancer, the S-Corp election can be powerful: you pay yourself a “reasonable salary” (subject to payroll taxes) and take the rest as distributions (not subject to self-employment tax). The distributions still qualify for the QBI deduction.
At the new 23% rate, the tax savings from this structure are even more meaningful. Consult with a tax professional to determine if this makes sense for your income level.
3. Manage Your Taxable Income Around Thresholds
If you’re near the SSTB phase-out thresholds, strategies like maximizing retirement contributions (SEP IRA, Solo 401(k)), timing income and expenses, and using the home office deduction can keep your taxable income below the phase-out range.
4. Separate Personal and Business Expenses
Mixed personal and business expenses create complexity in QBI calculations and increase audit risk. Use a dedicated business bank account and expense tracking app to keep everything cleanly separated.
5. Maximize Retirement Contributions
Contributions to a SEP IRA (up to 25% of net self-employment income, max ~$70,000 in 2026) or Solo 401(k) reduce your taxable income, which can keep you below SSTB thresholds and increase your QBI deduction eligibility. Plus, the contributions themselves reduce your taxable income separately from QBI.
QBI Deduction vs. Other OBBBA Changes
The QBI deduction works alongside other OBBBA tax provisions to create layered savings:
| OBBBA Provision | How It Interacts with QBI |
|---|---|
| Section 179 (equipment deduction) | Reduces your net income, lowering your QBI base — but saves more in direct deductions |
| 100% Bonus Depreciation | Same effect as Section 179 — reduces QBI but provides larger direct savings |
| Home Office Deduction | Reduces Schedule C net income, which reduces QBI — but total tax savings increase |
| SALT Deduction ($40K cap) | Reduces taxable income on personal return, which may affect the QBI cap (23% of taxable income) |
| R&D Expense Deduction | Immediately deductible R&D expenses reduce net income and QBI base |
The key insight: taking legitimate business deductions is almost always better than protecting your QBI base. The math works out in your favor because the direct tax savings from deductions exceed the lost QBI benefit in nearly every scenario.
Record-Keeping for the QBI Deduction
To claim the QBI deduction correctly, you need:
- Accurate income records: Track all business revenue from invoices, payments, and 1099 forms
- Complete expense documentation: Receipts, bills, and records for every business expense that reduces your net income
- Business vs. personal separation: Clean records showing which expenses are business-related
- W-2 records: If you have an S-Corp, your W-2 wages affect the high-income limitation calculations
Using a consistent system to track business expenses throughout the year means your QBI calculation is based on complete, accurate data — not estimates or guesswork.
Frequently Asked Questions
Is the QBI deduction permanent now?
Yes. The OBBBA permanently extended the Section 199A QBI deduction, which was previously scheduled to expire after December 31, 2025. The 23% rate applies to all tax years beginning after December 31, 2025.
Do I need to file any special forms for the QBI deduction?
If your situation is straightforward (below income thresholds, single business), the QBI deduction is calculated on your tax return and doesn’t require a separate form. For more complex situations (multiple businesses, income above thresholds, SSTBs), Form 8995 or Form 8995-A is used.
Can I claim the QBI deduction if I have a loss?
If your qualified business has a net loss, you don’t get a QBI deduction for that business — but the loss carries forward to reduce QBI in future years. If you have multiple businesses, losses from one reduce the QBI from others.
Does rental income qualify for QBI?
Rental income may qualify if the rental activity rises to the level of a trade or business. The IRS provides a safe harbor: if you spend 250+ hours per year on rental activities and maintain separate books and records, rental income generally qualifies. Tracking rental property expenses properly is essential for this determination.
What’s the difference between the 20% and 23% rate?
The 2025 tax year (and all prior years) uses the 20% rate. Starting with the 2026 tax year, the rate is 23%. Your 2026 return (filed in early 2027) will be the first to use the higher rate. The difference is 3 percentage points of your qualified business income — for a freelancer earning $100,000 QBI, that’s an extra $3,000 deduction.
Bottom Line
The QBI deduction at 23% is one of the most valuable tax benefits available to freelancers and small business owners in 2026. It’s permanent, it’s more generous than before, and it directly rewards accurate record-keeping.
Every dollar of documented business expense reduces your taxable income and contributes to a correct QBI calculation. Start tracking your receipts with SparkReceipt to ensure you’re capturing every expense that feeds into your QBI — and keeping more of what you earn.
