For a taxpayer above the fully phased-in threshold, the QBI component for a qualified business is limited to the greater of 50% of W-2 wages or:

25% of W-2 wages plus 2.5% of the unadjusted basis immediately after acquisition (UBIA) of qualified property

25% of W-2 wages plus 10% of UBIA

Which is included in qualified business income?

Net profit from a sole proprietorship's Schedule C

Interest income not allocable to a business

Guaranteed payments to a partner for services rendered

A single attorney with 2025 taxable income of $260,000 (before the QBI deduction) runs a law practice. What QBI deduction is available for the practice?

None, because a specified service trade or business is fully excluded above $247,300

20% of QBI, limited to the greater of 50% of W-2 wages or 25% of wages plus 2.5% of UBIA

What is the overall limit on the QBI deduction?

20% of taxable income minus net capital gain (including qualified dividends)

How is a net negative QBI (a qualified business loss) treated?

It carries forward to the next year and reduces QBI in that year

It is deductible against wages and other nonbusiness income in the current year

Besides QBI, what other income is eligible for the 20% deduction under IRC 199A?

Qualified REIT dividends and qualified publicly traded partnership income

Qualified dividends received from domestic C corporations held for over 60 days

Does the QBI deduction reduce self-employment tax or AGI?

No; it reduces taxable income only

It reduces both SE tax and AGI dollar for dollar

Qualified business income (QBI) deduction

The section 199A deduction is generally 20% of qualified business income from pass-throughs and sole proprietorships; for 2025 it is limited by W-2 wages and property (UBIA) and phased out for specified service businesses above $197,300 of taxable income ($394,600 joint), and capped at 20% of taxable income less net capital gain.

Updated 2026-09-23 · 5 sources · By the EnrolledAgentKit team

Exam part

Part 2

Businesses

IRS domain

Business Tax Preparation

37 of 85 scored Qs

Tax year tested

2025

2026-27 SEE

Practice questions

10 free below

The rules the exam tests

Figures for tax year 2025, the year the 2026-27 SEE tests. Verify against the cited primary source.
Rule	What it says (2025)	Source
Base deduction	20% of QBI (+20% of REIT dividends and PTP income)	IRC 199A
Threshold (2025)	$197,300; $394,600 MFJ; phase-in over $50,000 / $100,000	Rev. Proc. 2024-40
W-2/UBIA limit	Greater of 50% of W-2 wages or 25% of wages + 2.5% of UBIA	IRC 199A(b)(2)
SSTB	Health, law, accounting, consulting, financial services, etc.; excluded above top of range ($247,300 / $494,600)	IRC 199A(d)
Not QBI	Employee wages, S corp reasonable comp, guaranteed payments, investment income	IRC 199A(c)
Overall cap	20% of (taxable income - net capital gain)	IRC 199A(a)
Negative QBI	Carries forward to reduce future QBI	Treas. Reg. 1.199A-1(c)(2)
Rental safe harbor	250 hours of rental services, separate books (Rev. Proc. 2019-38)	Rev. Proc. 2019-38
Forms	Form 8995 (below threshold) / 8995-A	IRS

Worked example

Facts: Single consultant, Schedule C QBI $120,000, taxable income before QBI $150,000, no capital gains.

Below the $197,300 threshold, so SSTB and W-2 limits do not apply. QBI component 20% x $120,000 = $24,000; cap 20% x $150,000 = $30,000. Deduction $24,000. At $260,000 of taxable income she would get zero, because consulting is an SSTB above $247,300.

Exam traps

Guaranteed payments and S corp wages are not QBI.
Engineering and architecture are not SSTBs.
The deduction reduces taxable income only, not AGI or SE tax.
The cap subtracts net capital gain (including qualified dividends).