QBI Is Permanent: How S Corporation Wages Affect It

For years, the 20% qualified business income (QBI) deduction carried an expiration date at the end of 2025. The One Big Beautiful Bill Act (OBBBA) removed it. Section 199A is now a permanent part of the tax code, with wider phase-in ranges and a new minimum deduction. For S corporation owners, one planning lever matters more than any other: the wages the company pays, including the wages it pays you.

What Changed for 2026

The Franchise Tax Board's summary of the OBBBA describes the federal changes, which apply to tax years beginning after December 31, 2025:

• The 20% deduction is permanent.
• The phase-in range above the threshold widens from $50,000 to $75,000 ($100,000 to $150,000 on a joint return).
• A minimum deduction of $400 applies to taxpayers with at least $1,000 of QBI from active businesses in which they materially participate, as the IRS explains. Both amounts are indexed after 2026.

The 2026 Thresholds

Under Rev. Proc. 2025-32, the 2026 threshold amounts and the top of the phase-in ranges are:

• Married filing jointly: threshold $403,500; fully phased in at $553,500.
• Married filing separately: threshold $201,775; fully phased in at $276,775.
• All other returns: threshold $201,750; fully phased in at $276,750.

Below the threshold, the deduction is generally 20% of QBI, subject to the overall limit of 20% of taxable income minus net capital gain. Above the threshold, two additional limits phase in.

The W-2 Wage Limit

Above the threshold, the deduction for each business is limited under Section 199A(b)(2) to the greater of:

• 50% of the W-2 wages paid by the business, or
• 25% of W-2 wages plus 2.5% of the unadjusted basis of qualified property.

For a service business with little equipment, the 50% wage test usually controls. That is where S corporation wages come in.

How S Corporation Wages Cut Both Ways

The IRS lists "amounts received as reasonable compensation from an S corporation" among the items that are not QBI. So the salary an S corporation pays its owner does two things at once:

• It reduces QBI. Every dollar of salary lowers the company's profit, and therefore the 20% deduction base.
• It increases W-2 wages. The same dollar counts toward the 50% wage limit.

Consider a hypothetical S corporation owner who files jointly with taxable income of $700,000, well above the $553,500 top of the phase-in range. The business is not a specified service business, has no significant equipment, and earns $500,000 before paying its owner.

• Owner salary of $100,000: QBI is $400,000, and 20% is $80,000. The wage limit is 50% of $100,000, or $50,000. The deduction is $50,000.
• Owner salary of $150,000: QBI is $350,000, and 20% is $70,000. The wage limit is 50% of $150,000, or $75,000. The deduction is $70,000.

In this example, the higher salary increases the deduction by $20,000. But it also adds $50,000 of wages subject to payroll tax, so the net result depends on Social Security, Medicare, and California payroll costs. The deduction peaks when wages equal about two-sevenths of profit before wages, the point where 20% of QBI equals 50% of wages, but salary cannot be set to optimize QBI alone. It must first be reasonable compensation for the services the owner performs. See our Briefing on S corporation reasonable salary.

Specified Service Businesses

For specified service trades or businesses such as health, law, accounting, consulting, and financial services, the deduction phases out entirely over the phase-in range. The OBBBA kept that rule. A physician or consultant filing jointly with 2026 taxable income above $553,500 generally receives no QBI deduction from that practice, regardless of wages.

California Does Not Allow QBI

California never adopted Section 199A. The FTB confirms that California does not conform to the federal QBI deduction under Revenue and Taxation Code Section 17201.6. Any wage decision made to improve the federal deduction will not produce a matching California benefit. For S corporations, California's pass-through entity elective tax is computed on the owners' pro rata shares of income, and owner wages reduce that share, which is one more reason to model salary changes on both returns.

Year-End Steps

• Project 2026 taxable income against the $201,750 and $403,500 thresholds.
• Test the wage limit if you are above the threshold, before the last payroll.
• Coordinate with depreciation. Large bonus depreciation deductions reduce QBI. See placing equipment in service by December 31.
• Document material participation if you rely on the new $400 minimum deduction.

Our earlier Briefing on leveraging Section 199A covers the deduction's structure. This update reflects permanence and the 2026 thresholds. For other year-end items, see our 2026 year-end checklist.

Key Takeaways

• The QBI deduction is permanent, with wider phase-in ranges and a $400 minimum deduction starting in 2026.
• For 2026, the limits begin above taxable income of $201,750 ($403,500 joint) and fully apply at $276,750 ($553,500 joint).
• S corporation wages reduce QBI but increase the W-2 wage limit, so the right salary must be both reasonable and modeled.
• California does not allow the QBI deduction.

If you want your 2026 owner salary tested against both reasonable compensation and the QBI wage limit, schedule a consultation with SMB CPA Group. You can also contact us, learn about our custom scope of work, or review our pricing.

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