By If you operate your business as a proprietorship, a partnership, or an S corporation, tax code Section 199A can give you a deduction of up to 20 percent of your qualified business income. And here’s the good news: the deduction is now permanent, and beginning in 2026, the rules are friendlier than before.
For 2026, if your taxable income is $403,500 or less (married, filing jointly) or $201,750 or less (single or head of household), you qualify for the deduction regardless of your type of business.
Above those thresholds, the tax code splits businesses into two camps: in-favor businesses, which can still qualify, and out-of-favor “specified service trades or businesses” (SSTBs), such as consulting, which lose the deduction entirely once taxable income exceeds $553,500 (married) or $276,750 (single). There is one bright spot: the phase-in range between those numbers is now 50 percent wider, so a partial deduction survives at higher incomes than before.
If your business mixes in-favor and out-of-favor activities, two de minimis rules can rescue you:
- If out-of-favor receipts are less than 10 percent of gross receipts (5 percent if receipts exceed $25 million), the entire business is treated as in favor.
- You can operate two trades or businesses—one in favor, one out of favor—by keeping separate books, separate invoices, and ideally separate employees for each activity.
In short, careful bookkeeping can turn a zero deduction into a substantial one. Also note that the new $400 minimum deduction does not help a pure SSTB above the ceiling, which is one more reason to carve out a genuine in-favor business where possible.
If you want to discuss the Section 199A rules, please call me on my direct line at 408-778-9651.