The 20% QBI Deduction and Form 8995: Basics
Published November 5, 2026
If you run a business as a sole proprietor, or you own a share of a partnership, S corporation, or certain trusts, you may qualify for the qualified business income (QBI) deduction. It can lower the income tax you owe on your business profit. The deduction can be up to 20% of your QBI. IRS: About Form 8995
What QBI means
QBI is the net income from a qualified trade or business. Net means your business income minus the business expenses you can deduct. A business run by a C corporation does not qualify. Wages you earn as an employee do not count as QBI either. IRS: Instructions for Form 8995 (2025)
The 20% limit
Your deduction has a cap. It cannot be more than 20% of your taxable income before the QBI deduction, minus your net capital gain. For this step, qualified dividends are added to the net capital gain. So a year with large capital gains can reduce the deduction. IRS: Instructions for Form 8995 (2025)
Form 8995 or Form 8995-A
For 2025, you can use the simpler Form 8995 if your taxable income before the QBI deduction is $197,300 or less. If you file married filing jointly, the limit is $394,600. Above those amounts, you use Form 8995-A. IRS: Instructions for Form 8995 (2025)
Service businesses
Some businesses are called specified service trades or businesses (SSTBs). The IRS lists fields such as health, law, accounting, consulting, athletics, performing arts, and financial services. An SSTB is generally not a qualified trade or business. There are exceptions. If your taxable income is at or below the 2025 limit, the SSTB is treated as a qualified trade or business. Above the limit, only part of the SSTB may count, and you complete Schedule A (Form 8995-A). IRS: Instructions for Form 8995 (2025)
Who can claim it
Individuals can claim the QBI deduction. Some estates and trusts can claim it too. You can receive QBI from a sole proprietorship, or from a pass-through entity such as a partnership or an S corporation. The entity's income reaches its owners, and each owner reports a share. IRS: Instructions for Form 8995 (2025)
Filing status and the threshold
Your filing status sets the threshold. Single, head of household, and other non-joint filers use $197,300. Married couples filing jointly use $394,600. The threshold is based on your taxable income before the QBI deduction, not on your business profit. So a person with a large salary and a small business can still pass the threshold. IRS: Instructions for Form 8995 (2025)
Example
Illustration only, with made-up numbers. Maya runs a home bakery as a sole proprietor. Her net profit is $30,000. Her taxable income before the QBI deduction is $40,000, and she has no capital gains. Twenty percent of her QBI is $6,000. Twenty percent of her taxable income is $8,000. Her deduction is the smaller amount, so she claims $6,000.
Records to keep
Keep your business income and expense records for each year. Keep any Schedule K-1 you receive from a partnership, S corporation, or trust. Keep your Form 8995 or Form 8995-A with your return. These records show how you figured your net QBI. If you run more than one business, keep a separate record for each one. That makes it easier to list each business's net profit.
Steps to take
- Confirm that your business is not run by a C corporation, and that your income is not wages.
- Add up the net profit from each qualified business for the year.
- Find your taxable income before the QBI deduction, and your net capital gain.
- Check the 2025 limit for your filing status: $197,300, or $394,600 if married filing jointly.
- Use Form 8995 if you are at or below the limit. Use Form 8995-A if you are above it.
General information, not advice about your return.
Sources: Sources: IRS, About Form 8995, Qualified Business Income Deduction Simplified Computation (https://www.irs.gov/forms-pubs/about-form-8995); IRS, Instructions for Form 8995 (2025) (https://www.irs.gov/pub/irs-pdf/i8995.pdf) This is general information, not advice about your specific return.
