The 20 percent business deduction and the state tax your business can pay for you

Owners of partnerships, S corporations and sole proprietorships can usually claim the section 199A deduction of up to 20 percent of qualified business income (QBI), meaning the profit passed through to you on a K-1 or Schedule C. The entity-level state tax can ease the SALT cap; we cover both with the Kitchen-Table K-1 Check below.

Where the limits begin (taxable income)

The IRS publishes next year's figures each fall and released the 2027 amounts on November 5, 2026, with a $415 minimum.

An invented example

Sam, single, has $239,250 of 2026 taxable income before the deduction. His non-service shop has $200,000 of QBI and $40,000 of W-2 wages, with no depreciable property. Twenty percent of QBI would be $40,000, but the wage limit, 50 percent of wages, is only $20,000. Sam sits $37,500 inside the $75,000 range, so half of that $20,000 gap applies: $40,000 less $10,000 is a $30,000 deduction. The old range would have left $25,000.

The entity tax and the SALT cap

The 2025 law raised the personal cap but left untouched any income tax a partnership or S corporation pays itself. Under Notice 2020-75 the entity deducts it, so it escapes your cap.

The cap was $40,000 for 2025, is $40,400 for 2026, rises 1 percent a year for 2027 to 2029, then stays at $10,000. It shrinks by 30 percent of modified adjusted gross income (MAGI) over $500,000 (2025) or $505,000 (2026), never below $10,000.

Illinois lets a partnership or S corporation elect each year, on its return, to pay 4.95 percent of its net income. Owners get a credit, a 1.5 percent replacement tax still applies, and the election becomes irrevocable once the extended due date passes. Illinois dropped the end date in December 2025, so the tax lasts while the federal cap applies.

The Kitchen-Table K-1 Check

People in this situation often consider these steps; ask your adviser.

• Set each K-1 and Schedule C beside your 2026 income and the thresholds above.
• Note each business's W-2 wages and equipment cost; they drive the limit.
• Mark any service business (health, law, consulting); its deduction phases out across the range.
• Ask whether an Illinois election fits; the trap is that it is fixed after the extended due date.

See the pass-through group, equipment and research costs, our 2026 figures and state taxes.

Common questions

Official sources

• Public Law 119-21 (enacted text, sections 70105 and 70120)
• IRS Revenue Procedure 2026-35 (2027 amounts)
• IRS Revenue Procedure 2025-32 (2026 amounts)
• IRS Revenue Procedure 2024-40 (2025 amounts)
• IRS Notice 2020-75 (entity-level state tax)
• Illinois Department of Revenue: Publication 129, pass-through entity payments

Keep reading

• Pass-through and corporate updates for small businesses
• Equipment and research costs: what a small business can deduct right away
• Qualified small business stock, C corporations and the new 1099 thresholds
• The 2026 tax numbers, all on one page