Pass-Through Tax Breaks in 2026: What Business Owners Need to Know
Pass-through businesses continue to receive valuable federal tax benefits in 2026. Whether you operate as a sole proprietorship, partnership, LLC, or S corporation, understanding these tax incentives can help reduce your overall tax liability and improve cash flow.
The most significant benefit remains the Qualified Business Income (QBI) Deduction under IRC Section 199A. In addition, businesses performing qualified research may benefit from immediate domestic research expensing and valuable federal research tax credits.
The Section 199A QBI Deduction
The Section 199A deduction allows eligible noncorporate taxpayers to deduct up to 20% of Qualified Business Income (QBI).
The deduction is generally the lesser of:
- 20% of qualified business income (QBI), or
- 20% of taxable income after reducing it by net capital gains.
Taxpayers may also deduct 20% of qualified REIT dividends and qualified publicly traded partnership (PTP) income, subject to applicable limitations.
Unlike many business deductions, the QBI deduction is claimed on the owner’s individual tax return—not by the business itself.
Who Qualifies?
The QBI deduction is generally available to owners of:
- Sole proprietorships
- Single-member LLCs
- Partnerships
- S corporations
- Certain trusts and estates
Generally, C corporations and employee wage income do not qualify for the deduction.
2026 Income Thresholds
For the 2026 tax year, the IRS has increased the taxable income thresholds:
Threshold Amounts
- Married Filing Jointly: $403,500
- Married Filing Separately: $201,775
- Single and Head of Household: $201,750
Phase-In Range Ends At
- Married Filing Jointly: $553,500
- Married Filing Separately: $276,775
- Single and Head of Household: $276,750
Once taxable income exceeds these thresholds, additional limitations may reduce or eliminate the deduction.
New $400 Minimum QBI Deduction
Beginning in 2026, eligible taxpayers may qualify for a minimum $400 QBI deduction if they:
- Have at least $1,000 of aggregate qualified business income, and
- Materially participate in one or more active qualified trades or businesses.
This provision helps ensure many active small business owners receive a meaningful deduction, even when the standard QBI calculation would otherwise produce a very small benefit.
W-2 Wage and Property Limitation
Higher-income taxpayers may be subject to additional limitations.
The deduction may be limited to the greater of:
- 50% of W-2 wages paid by the business, or
- 25% of W-2 wages plus 2.5% of the unadjusted basis immediately after acquisition (UBIA) of qualified business property.
This limitation:
- Does not apply below the income threshold.
- Gradually phases in as income increases.
- Applies fully once taxable income exceeds the phase-in range.
Specified Service Trade or Business (SSTB) Rules
Special rules apply to Specified Service Trades or Businesses (SSTBs), including:
- Health care
- Law
- Accounting
- Consulting
- Financial services
- Brokerage services
- Performing arts
- Athletics
- Investment management
For 2026:
- Below the income threshold, SSTBs generally qualify.
- Within the phase-in range, the deduction is gradually reduced.
- Above the phase-in ceiling, most SSTBs no longer qualify for the QBI deduction.
Additional Tax Benefits for Pass-Through Businesses
Immediate Domestic Research & Experimental (R&E) Expensing
Businesses conducting qualified domestic research may generally deduct eligible research and experimental (R&E) expenditures immediately under IRC Section 174A.
Foreign research expenditures generally continue to be amortized over 15 years.
Research Tax Credit
Businesses performing qualified research activities may also qualify for the IRC Section 41 Research Tax Credit.
For pass-through entities, the credit generally flows through to the owners, allowing eligible taxpayers to claim the benefit on their individual tax returns.
Key Takeaways
✔ Eligible owners may deduct up to 20% of qualified business income.
✔ Higher 2026 income thresholds expand eligibility for many taxpayers.
✔ A new $400 minimum deduction benefits qualifying active business owners.
✔ Wage and property limitations apply to many higher-income taxpayers.
✔ SSTBs face additional restrictions once income exceeds the applicable thresholds.
✔ Domestic research expenses may now qualify for immediate deduction.
✔ Qualified businesses may also benefit from valuable federal research tax credits.
Need Help Maximizing Your Business Tax Savings?
Our CPA team helps business owners maximize Section 199A deductions, evaluate research tax credit opportunities, and develop proactive tax strategies tailored to their business structure.
Contact our CPA team today to make sure you’re taking full advantage of every available 2026 business tax break.
Strategic tax planning can help your business reduce taxes, improve cash flow, and keep more of what you earn.
