QBI Deduction for Sole Proprietors: 20% Pass-Through Rules 2026

The Qualified Business Income (QBI) deduction is no longer a temporary tax perk you hope survives another year. With the passage of the One Big Beautiful Bill Act (OBBBA), Section 199A is now a permanent part of the tax code.

For sole proprietors, that changes how you should plan. The QBI deduction is no longer just about reducing this year’s tax bill — it’s a long-term planning tool that affects how you structure income, expenses, property acquisitions, and even retirement contributions.

The bill introduces new minimum deductions and expanded income ranges, giving you even more tax benefits in 2026.

In this guide, we explain how the 20% QBI deduction works for sole proprietors and how to plan strategically around it.

Key takeaways

• The OBBBA makes the 20% QBI deduction permanent, enabling multi-year tax planning.
• Beginning in 2026, taxpayers with at least $1,000 in QBI can claim a minimum $400 deduction.
• Phase-in ranges expand to $75,000 for single filers and $150,000 for joint filers.
• Rental income qualifies only if it rises to the level of a trade or business or meets IRS Safe Harbor rules.
• Managing income timing, expenses, and property basis can materially increase your deduction.

What is the Qualified Business Income (QBI) deduction?

The Qualified Business Income deduction — commonly called the Section 199A deduction — allows eligible sole proprietors to deduct up to 20% of qualified business income from taxable income.

This is a below-the-line deduction, meaning it reduces taxable income rather than adjusted gross income (AGI). As a result, you can claim it whether you itemize deductions or take the standard deduction.

The deduction applies to pass-through businesses, including sole proprietorships, and can significantly lower the effective tax rate on business and rental income.

However, not all income qualifies. Only income generated from a qualified trade or business operating in the United States counts toward QBI (more on this later).

QBI deduction changes in 2026: What the OBBBA means for sole proprietors

The OBBBA shifts how sole proprietors should approach QBI planning. Instead of reacting year by year, you can now build long-term strategies with confidence.

The deduction is now permanent

Section 199A no longer expires. That removes a major source of uncertainty and allows you to make durable decisions — expanding a rental portfolio, reinvesting profits, or restructuring operations — without worrying that the deduction will disappear.

A new minimum QBI deduction

In 2026, taxpayers who materially participate in an active trade or business and earn at least $1,000 in QBI can claim a minimum $400 deduction. This ensures you receive a meaningful benefit even when profits are modest.

Expanded phase-in income ranges

The income ranges where QBI limitations begin have increased:

• $75,000 for single filers
• $150,000 for joint filers

These higher thresholds give you more room to claim the full 20% deduction before wage and property limitations apply.

When does a sole proprietor landlord “count” as a business

As a sole proprietor, your rental activity will be considered a legitimate business if you treat it as one, involving regular and continuous activity with the intent to make a profit. Sporadic or hobby-like rentals typically do not qualify. This means you must actively manage properties rather than simply collecting passive income.

Safe Harbor rules

The IRS created a practical path for small, self-managing landlords to have their rental activity treated as a trade or business. To qualify under the Safe Harbor, you must:

• Maintain separate books and records that reflect property expenses and income for each rental unit.
• Perform at least 250 hours of rental services per year (if you’ve been in real estate for less than 4 years).
• Keep contemporaneous records documenting these services—including time reports, logs, or similar documents

Qualifying services include maintenance, tenant communication, rent collection, and property management. These services can be performed by the owner, employees, or independent contractors (including cleaners, handymen, or even a part‑time property manager), and still count toward the 250 hours. Track these hours with our free time tracker template.

Note: Even without Safe Harbor, you may still qualify as operating a trade or business based on the facts and circumstances of your activity. However, the Safe Harbor provides clearer guidelines and stronger protection if your rental qualifies.

Also read: Best banks for sole proprietorship

What counts as Qualified Business Income for a sole proprietor?

For most sole proprietors, QBI starts with net profit reported on Schedule C or net rental income reported on Schedule E. However, QBI is not simply your bottom-line profit. Several deductions reduce the amount of income eligible for the QBI deduction, including:

• The deductible portion of the self-employment tax (aka sole proprietorship taxes)
• Self-employed health insurance premiums
• Contributions to self-employed retirement plans, such as a SEP IRA or Solo 401(k)

These adjustments lower your QBI base, which directly affects the size of your deduction.

Note: The QBI deduction is separate from ordinary rental expenses. Mortgage interest, property taxes, repairs, and depreciation still reduce the net rental income that feeds into the QBI calculation. Rental income appears on Schedule E, while the QBI deduction itself is reported on Form 1040 as a separate deduction below the line.

Income that does not qualify as QBI

Some types of income are explicitly excluded from QBI, including:

• Capital gains and losses
• Dividends
• Interest income not related to the business
• W-2 wages earned as an employee
• Guaranteed payments to partners

Because these exclusions matter, separating personal and business finances is critical. Using a business checking account for a sole proprietor makes it easier to accurately track qualifying income.

Also read: Best sole proprietor bank account

How to calculate the QBI deduction as a sole proprietor

While tax software handles the math, understanding the steps helps with planning.

1. Determine your QBI: Start with net business or rental income. Subtract excluded income and required adjustments, such as self-employment tax deductions and retirement contributions.
2. Calculate taxable income: Determine your taxable income before the QBI deduction. This sets the overall cap.
3. Calculate 20% of QBI: Multiply your QBI by 20%. If your adjusted QBI is $100,000, this component is $20,000.
4. Apply the taxable income limit: Your QBI deduction cannot exceed 20% of taxable income (minus net capital gains).
5. Check income thresholds: If your income is below the phase-in threshold, you generally receive the full deduction. Above it, additional limits apply.
6. Apply W-2 wage and UBIA limits: For higher-income taxpayers, the deduction is limited to the greater of 50% of W-2 wages paid, or 25% of W-2 wages plus 2.5% of the unadjusted basis (UBIA) of qualified property.

This is where you can benefit. Even without employees, you can rely on the 2.5% UBIA rule.

7. Consider SSTB rules: If your business is a Specified Service Trade or Business and income exceeds the phase-out range, the deduction may be reduced or eliminated.

QBI deduction in action

If you have $400,000 in QBI, no employees, and $2.8 million in qualified property (UBIA). 20% of the QBI is $80,000. Because you fall into the high-income bracket, you need to check the limitations.

• 50% of W-2 wages ($0) = $0.
• 2.5% of $2.8 million UBIA = $70,000.

The deduction is limited to $70,000. Without the property basis (UBIA), the deduction would have been zero.

How to claim QBI deduction: Forms 8995 and 8995-A

The IRS provides two forms for reporting this deduction.

Form 8995 (Simplified)

Use this form if your taxable income is below the threshold ($197,300 for singles in 2026, estimated) and you are not an estate or trust.

Form 8995-A (Complex)

Use this form if your taxable income is above the threshold or if you are aggregating businesses. This form handles the W-2 wages, UBIA, and phase-out reductions.

Whether you use the simple or complex form, maintaining clean records is non-negotiable. Using property tax management software can help organize the necessary data points for your rental properties.

Common QBI deduction mistakes for how to avoid them

QBI calculation errors can lead to IRS audits or missed savings. Pay close attention to the following common mistakes.

• Misclassifying income: Including capital gains or interest income in your QBI calculation artificially inflates your deduction and is non-compliant.
• Ignoring income thresholds: Failing to check if you are in the phase-in or phase-out range can lead to surprise tax bills.
• Overlooking UBIA: Unadjusted basis of their property (the original purchase price of the building, not land) is a key factor in calculating the deduction limit.
• Passive vs. active confusion: Rental income does not automatically qualify. Safe Harbor or trade-or-business standards must be met.
• Commingling funds: Non-separation of business expenses from personal ones jeopardizes your "separate books" requirement for the Safe Harbor. Learn how to set up​ a sole proprietorship bank account and ensure your records are audit-proof.

Optimizing your QBI deduction: Strategic planning for sole proprietors

To maximize the sole proprietor QBI deduction, actively manage your taxable income. This is often called "QBI Bracket Management."

QBI bracket management

If you are near the income threshold, lowering taxable income can preserve the deduction. Retirement contributions or timing expenses may help — but remember that some deductions reduce QBI itself, so optimization requires balance.

Aggregating multiple businesses

If you own multiple businesses—for example, a rental portfolio and a consulting firm—you may be able to aggregate them. This allows you to combine W-2 wages and UBIA from all businesses to maximize the deduction limit. This strategy requires consistent reporting and careful analysis.

Use dedicated bookkeeping platforms

You cannot optimize what you do not track. Using ensures every deductible property expense is captured, lowering your net income to legal minimums while maximizing the accuracy of your QBI reporting.

You can use generic accounting software, such as QuickBooks for landlords, or dedicated sole proprietor bookkeeping software that offers real-estate-specific categorization and reporting to track income and expenses and generate reports for tax season.

Use Baselane to keep QBI records clean and audit-ready

Baselane combines banking and bookkeeping to help you maintain property-specific accounts and automatically categorize transactions to Schedule E. This gives you real-time visibility into net operating income and simplifies QBI calculations.

You also get a ready-to-export tax package for your CPA, making year-end filing faster and cleaner. Create your account with Baselane today.