The Qualified Business Income (QBI) deduction under IRC § 199A has been one of the most valuable provisions of the Tax Cuts and Jobs Act — allowing pass-through business owners to deduct up to 20% of their qualified business income from federal taxes. But for millions of high-earning professionals — doctors, lawyers, accountants, consultants, financial advisors — the deduction has been completely unavailable. Their professions fall into a category called Specified Service Trades or Businesses (SSTBs), which phase out at relatively modest incomes under the original TCJA rules.
The One Big Beautiful Bill Act, signed July 4, 2025, changed this significantly. Starting tax year 2026, the income thresholds where the SSTB phase-out begins and ends have been expanded dramatically. Professionals who previously earned even $50,000 over the old threshold and received $0 in QBI deduction may now be entitled to a substantial partial deduction.
What Is an SSTB?
A Specified Service Trade or Business is any trade or business whose principal asset is the reputation or skill of one or more of its employees or owners. The IRS defines specific categories:
- Health — physicians, dentists, veterinarians, physical therapists, pharmacists, and other healthcare providers
- Law — attorneys, paralegals, legal consultants
- Accounting — CPAs, enrolled agents, bookkeepers
- Actuarial science
- Performing arts — actors, musicians, directors (but not broadcasters or athletes)
- Consulting — business, management, and personal advice
- Athletics — athletes, coaches
- Financial services — financial advisors, investment managers, brokers
- Brokerage services
If you provide professional services in any of these categories, your business income is SSTB income, and different phase-out rules apply.
Engineering and architecture are explicitly excluded from SSTB status. Engineers and architects get the full QBI deduction without the SSTB limitations.
What Were the Old Thresholds (Pre-OBBBA)?
Under the original TCJA rules as applied through 2025:
- Single filers: SSTB phase-out began at ~$182,050 taxable income, fully phased out at ~$232,050
- Married filing jointly: Phase-out began at ~$364,200, fully phased out at ~$464,200
For any SSTB owner with taxable income above these "full phase-out" thresholds, the deduction was $0. A single physician with $300,000 in taxable income got nothing — they were $68,000 above the phase-out ceiling.
The New 2026 Thresholds Under OBBBA
The OBBBA permanently expanded the SSTB phase-out range:
| | Single Filers | MFJ Filers | |---|---|---| | Phase-out begins | $201,775 | $403,500 | | Phase-out ends (full phase-out) | $276,775 | $553,500 | | Phase-out range width | $75,000 | $150,000 |
Compared to the old $50,000 range, this is a $75,000 range — wider, and starting higher. The practical effect:
- A single filer with $250,000 in taxable income was completely phased out before. Now they're in the middle of the phase-out range and receive a partial deduction.
- A physician earning $260,000 who previously got $0 may now receive a deduction of $6,000–$10,000 or more depending on specifics.
- Married couples filing jointly at $500,000 in taxable income were totally phased out. Now they're just entering the phase-out range.
How the Phase-Out Percentage Is Calculated
The phase-out works linearly across the threshold range. If your taxable income falls within the phase-out window:
Phase-out % = (taxable income − lower threshold) ÷ phase-out range
Allowable SSTB deduction = 20% × QBI × (1 − phase-out %)
Example: Single physician with $240,000 taxable income and $180,000 in SSTB net income
- Phase-out begins at $201,775, ends at $276,775 (range = $75,000)
- Phase-out % = ($240,000 − $201,775) ÷ $75,000 = $38,225 ÷ $75,000 = 50.97%
- Allowable deduction = 20% × $180,000 × (1 − 0.5097) = $180,000 × 0.20 × 0.4903 = $17,651
- Tax savings at 32% marginal rate: $5,648
Before OBBBA, this physician with $240,000 in taxable income was $8,000 above the old $232,050 ceiling and received exactly $0. Now they receive a $17,651 deduction worth over $5,600 in tax savings.
Use the SSTB QBI Deduction Calculator to enter your taxable income, SSTB income, filing status, and W-2 wages to see your exact deduction and tax savings.
The W-2 Wage Limitation Inside the Phase-Out Range
For taxpayers within the phase-out range, the W-2 wage limitation also applies proportionally. This limits the deduction to the greater of:
- 50% of W-2 wages paid by the business, or
- 25% of W-2 wages plus 2.5% of the unadjusted basis of qualified property
For sole proprietors and single-member LLCs who pay no W-2 wages to themselves, this limitation can be significant. For S-corporation owners who pay themselves a reasonable W-2 salary, the limitation is often not binding.
The W-2 wage limitation only kicks in once you're in the phase-out range. Below the phase-out threshold ($201,775 single), the W-2 limitation doesn't apply at all.
The New $400 Minimum QBI Deduction
OBBBA also added a new provision: a $400 minimum QBI deduction for any trade or business with at least $1,000 in qualified business income. This ensures that even high-income SSTB owners who are almost completely phased out still receive a token minimum deduction.
At the top of the phase-out range ($276,775 for single filers), the regular calculation would yield a $0 deduction (100% phased out). Under OBBBA's new provision, if QBI is at least $1,000, the deduction is at least $400.
This is a small amount, but it establishes an important principle: no SSTB owner with active income is completely excluded from the deduction.
Planning Strategies to Maximize the Deduction
Income reduction strategies to stay in the phase-out range:
If your taxable income is just above the $276,775 single / $553,500 MFJ ceiling, reducing taxable income by $5,000–$20,000 could move you from a $0 deduction to a meaningful partial deduction.
Options to reduce taxable income:
- Maximize traditional IRA or SEP-IRA contributions (each dollar contributed reduces taxable income by one dollar)
- Increase 401(k) contributions (S-corp owners can contribute as both employee and employer)
- Defer income to next year if on the cusp (e.g., delay December billing until January)
- Accelerate deductible business expenses (capital equipment, software, professional development)
W-2 wage planning for S-corporations:
For S-corp owners in the phase-out range, paying yourself a higher W-2 salary increases the W-2 wage limitation — which can allow a larger QBI deduction. This needs to be balanced against the additional payroll taxes on the higher salary.
Entity structure considerations:
If you're a sole proprietor, you have no W-2 wages and the limitation can restrict your deduction significantly in the phase-out range. Converting to an S-corporation and paying yourself a reasonable salary creates W-2 wages that support a larger deduction.
State Conformity: Does Your State Allow the QBI Deduction?
The QBI deduction is a federal provision. Many states do not conform to § 199A, meaning you won't receive an equivalent state income tax deduction:
States that do NOT conform to § 199A QBI deduction:
- California
- New York
- Pennsylvania
- New Jersey
- Hawaii
- Illinois (historically)
States that DO conform:
- Most other states follow federal treatment
If you live in California or New York, the QBI deduction reduces your federal taxes but has no impact on your state taxes. Factor this into your overall tax planning — the deduction is still valuable, but it's federal only.
Frequently Asked Questions
I'm a physician in a solo practice. Do I qualify? Physicians in the "health" SSTB category are subject to the phase-out. Under 2026 thresholds, if your taxable income is below $201,775 (single) or $403,500 (MFJ), you get the full 20% QBI deduction. Between those thresholds and $276,775/$553,500, you get a partial deduction. Above that, $400 minimum.
What about employed physicians with a side practice? The QBI deduction applies to income from your self-employed practice, not your W-2 wages. If you have a hospital W-2 and a solo practice, the QBI deduction applies to the practice income only.
I'm a consultant — does my entire revenue count as QBI? QBI is net income — revenue minus deductible business expenses. If your practice revenue is $400,000 but expenses are $150,000, your QBI is $250,000. The deduction is up to 20% of the $250,000 net amount.
Does electing S-corp status change my QBI calculation? Yes. In an S-corp, your W-2 salary is not QBI — only the remaining pass-through income (the S-corp distribution portion) counts as QBI. Paying yourself a higher W-2 salary reduces QBI but increases W-2 wages for the limitation test.
What IRS form do I use to claim the deduction? Form 8995 (simplified) or Form 8995-A (complex situations with multiple businesses, W-2 wage limitations, or income in the phase-out range). Most tax software handles this automatically, but understanding the inputs is important for planning purposes.
What if my income varies significantly year to year? This creates a natural QBI optimization opportunity. In years where income dips into the phase-out range, you receive a partial deduction. In years where income stays below the lower threshold, you receive the full 20% deduction. Planning income timing around the phase-out thresholds can meaningfully increase lifetime tax savings.