What is the qualified business income deduction, and how does it work for physicians?

The qualified business income (QBI) deduction lets owners of sole proprietorships, partnerships, S corporations and some trusts and estates deduct up to 20% of the income their business earns, plus up to 20% of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership income.

It is written into Section 199A of the Internal Revenue Code, so tax professionals also call it the Section 199A deduction or the pass-through deduction.

Health is one of the fields the tax code treats as a specified service trade or business (SSTB). A physician who owns a practice can claim the full deduction on practice income only when taxable income is at or below an annual threshold, which for tax year 2026 is $403,500 for married couples filing jointly and $201,750 for most other filers, according to the Internal Revenue Service (IRS) in Rev. Proc. 2025-32.

Above that line, the deduction from the practice shrinks across a phase-in range and reaches zero at $553,500 for joint filers and $276,750 for most others.

What is the qualified business income deduction?

The deduction was created by the 2017 Tax Cuts and Jobs Act for tax years beginning after Dec. 31, 2017, and was originally scheduled to expire after 2025. Public Law 119-21, the budget reconciliation package signed July 4, 2025, and commonly known as the One Big Beautiful Bill Act, made it permanent at 20%. The current text of Section 199A no longer carries a sunset date.

The deduction is claimed on the owner's individual return, not by the practice. S-corporations and partnerships aren't eligible for it themselves; they report each owner's share of QBI, W-2 wages, property basis and SSTB status on a statement attached to the Schedule K-1, according to the IRS's Section 199A FAQs.

Taxpayers can claim the deduction whether they itemize or take the standard deduction. It does not reduce net earnings from self-employment, so it has no effect on self-employment tax, according to the same IRS guidance.

Taxpayers whose taxable income before the deduction is at or below the threshold generally use Form 8995, the simplified computation.

Those above it use Form 8995-A, which includes a Schedule A for specified service businesses, per the 2025 instructions for Form 8995-A.

What income counts as qualified business income?

QBI is the net amount of qualified items of income, gain, deduction and loss from a qualified trade or business, and only items included in taxable income count, according to the IRS.

Capital gains and losses, certain dividends and interest income are excluded. So are three kinds of pay physicians commonly receive: W-2 wages, reasonable compensation an S corporation pays a shareholder and guaranteed payments a partnership makes to a partner.

Section 199A also leaves "the trade or business of performing services as an employee" out of the definition of a qualified trade or business.

A physician employed by a hospital, health system or medical group and paid on a W-2 has no QBI from that job, at any income level.

For a practice organized as an S corporation, the salary the physician-owner draws is excluded, and the profit that flows through on the K-1 can be QBI.

For a partner, guaranteed payments are excluded, and the partner's distributive share of profit can be QBI.

Why is a physician practice a specified service trade or business?

Section 199A(d)(2) defines an SSTB by borrowing the list of service fields in Section 1202(e)(3)(A), the provision that governs qualified small business stock, and removing engineering and architecture from it.

The fields that remain include health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services and brokerage services, along with investing, trading and dealing in securities and any business whose principal asset is the reputation or skill of its employees or owners, according to the IRS.

The Treasury Department's final regulations define services in the field of health as the provision of medical services by individuals such as physicians, pharmacists, nurses, dentists, veterinarians, physical therapists, psychologists and other similar health care professionals performing services in that capacity, under 26 CFR § 1.199A-5(b)(2)(ii). A practice in which physicians examine, diagnose and treat patients meets that definition.

The same regulation excludes services not directly related to a medical services field, even when they relate to a recipient's health.

Its examples are operating health clubs or spas; payment processing; and researching, testing, manufacturing or selling pharmaceuticals or medical devices.

In the regulation's worked examples, a company that operates outpatient surgical centers and handles their administration, but contracts out all medical care, is not performing services in the field of health.

Neither is a senior living operator that provides housing and meals and contracts out medical services, or a company that sells a patented diagnostic test to providers without patient contact or a role in diagnosis or treatment.

A pharmacist working as a contractor for a rural medical facility, reviewing physician orders and filling prescriptions, is.

Under a de minimis rule, a business with gross receipts of $25 million or less is not an SSTB if less than 10% of its gross receipts come from specified service activities. Above $25 million, the cutoff is 5%. A business over the applicable percentage is treated as an SSTB in its entirety.

When a business provides property or services to an SSTB and the two have at least 50% common ownership, the portion serving the SSTB is treated as a separate SSTB with respect to the common owners, under § 1.199A-5(c)(2).

The regulation's example is a law firm whose partners rent the firm its building through a separate partnership; that rental income is treated as SSTB income. The rule is written for any SSTB, including a medical practice that leases space from an entity its physicians own.

How do the income thresholds and phase-outs work?

The SSTB limit turns on taxable income computed before the QBI deduction, not on the practice's profit, under Section 199A(e)(1).

On a joint return, that figure includes a spouse's income and everything else on the return. The IRS adjusts the thresholds for inflation each year. For tax year 2026, the amounts in Rev. Proc. 2025-32 are:

For tax year 2025, the threshold was $394,600 for joint filers and $197,300 for all other returns, according to the 2025 Form 8995-A instructions, and the phase-in range was $100,000 for joint filers and $50,000 for others.

At or below the threshold

An SSTB is treated like any other qualified business. The deduction is the lesser of 20% of QBI, plus 20% of qualified REIT dividends and publicly traded partnership income, or 20% of taxable income after subtracting net capital gain, according to the IRS.

The W-2 wage and property limit does not apply.

Inside the phase-in range

Only an "applicable percentage" of the SSTB's QBI, W-2 wages and property basis counts toward the deduction. Under Section 199A(d)(3), the applicable percentage is 100% minus the share of the phase-in range the taxpayer's income has moved into. A joint filer $75,000 above the threshold is halfway through the $150,000 range, so the applicable percentage is 50%.

The W-2 wage and property limit phases in over the same range, and taxpayers in this range file Form 8995-A with its Schedule A.

Above the phase-in range

The SSTB does not qualify. Its QBI, W-2 wages and property basis are left out of the calculation, according to the Form 8995-A instructions.

The limit applies business by business, so a taxpayer above the range can still claim the deduction on QBI from a separate business that is not an SSTB and on qualified REIT dividends.

A worked example

A hypothetical physician, married and filing jointly in 2026, has $300,000 of QBI from a practice.

Assume no net capital gain, no other business income and a practice that pays its staff enough in W-2 wages that the wage limit does not reduce the result.

At $400,000 of taxable income, below the threshold, the deduction from the practice is $60,000, or 20% of $300,000. At $478,500, halfway through the phase-in range, the applicable percentage is 50% and the deduction is $30,000. Above $553,500, it is zero.

The figures are illustrative. Actual results come from the full Form 8995-A computation, including the wage and property limit.

What is the W-2 wage and property limit?

Above the threshold, the deduction for each business is capped at the lesser of 20% of its QBI or the greater of two amounts: 50% of the W-2 wages the business pays, or 25% of those wages plus 2.5% of the unadjusted basis of its qualified property, under Section 199A(b)(2).

The cap phases in over the same income range as the SSTB rule.

Above the top of the range, a medical practice's QBI is already excluded under the SSTB rule, so the wage limit has nothing to cap.

Inside the range, both limits apply to the reduced share of QBI, wages and property basis, and Part III of Form 8995-A walks through the reduction.

What changed under the 2025 tax law?

Public Law 119-21 removed the deduction's scheduled expiration and kept the rate at 20%. The House-passed version of the bill would have raised the rate to 23%, according to the Journal of Accountancy; the enacted law did not.

For tax years beginning after Dec. 31, 2025, the law widened the phase-in range from $50,000 to $75,000 for most filers and from $100,000 to $150,000 for joint filers.

That moves the income level at which an SSTB owner's deduction reaches zero higher than it would otherwise be.

The law also added a minimum deduction of $400 for taxpayers with at least $1,000 of QBI from one or more active trades or businesses in which they materially participate. Both amounts will be adjusted for inflation for tax years beginning after 2026, according to Rev. Proc. 2025-32.

Where can physicians find the official IRS rules?

The IRS publishes each year's thresholds in its annual inflation-adjustment revenue procedure, usually released in the fall. The 2026 figures are in Rev. Proc. 2025-32, announced in IR-2025-103 on Oct. 9, 2025.

The step-by-step calculation is in the instructions for Form 8995 and Form 8995-A, which the IRS updates each filing season. The legal text is in Section 199A and in the Treasury Department's final regulations, including 26 CFR § 1.199A-5 on specified service businesses.

The IRS's Section 199A FAQs remain a plain-language reference for definitions, though the agency now labels that page historical content that may not reflect current law. On IRS.gov, the agency groups the 2025 law's provisions under the name Working Families Tax Cuts.

Frequently asked questions about the QBI deduction for physicians

Can employed physicians claim the QBI deduction?

Not on their W-2 pay. Wages and the trade or business of performing services as an employee are excluded from QBI. Income from a separate business a physician owns can still qualify, subject to the same thresholds.

Is a medical practice a specified service trade or business?

Yes. Treasury regulations define the field of health to include medical services provided by physicians, so a practice in which physicians treat patients is an SSTB. A related business that operates facilities and contracts out all medical care may not be, depending on its facts.

Do physicians below the income threshold get the full QBI deduction?

Yes. At or below the threshold, $403,500 for joint filers and $201,750 for most others in 2026, an SSTB is treated as a qualified business. The deduction is generally the lesser of 20% of QBI or 20% of taxable income minus net capital gain.

At what income does a physician lose the QBI deduction entirely?

For tax year 2026, the deduction from a medical practice reaches zero when taxable income before the deduction exceeds $553,500 for joint filers or $276,750 for most other filers.

Does the QBI deduction reduce self-employment tax?

No. The IRS says the deduction does not reduce net earnings from self-employment.

Do you have to itemize to claim the QBI deduction?

No. The deduction is available whether a taxpayer itemizes or takes the standard deduction.

Can independent contractor income, such as moonlighting or locum tenens work, count as QBI?

Income a physician earns as an independent contractor rather than an employee, including locum tenens work paid on a 1099, is business income and can count as QBI. Because it comes from the field of health, it follows the same SSTB thresholds as practice income.

Is the QBI deduction expiring?

No. The 2025 tax law made Section 199A permanent at 20%, widened the phase-in ranges starting in 2026 and added a $400 minimum deduction for taxpayers with at least $1,000 of QBI from businesses in which they materially participate.