Your LLC or Side Business Could Qualify for a 20% Tax Deduction

Your LLC or Side Business Could Qualify for a 20% Tax Deduction. Here’s What Changed for 2026.

Weekend services, freelance work, and online shops may qualify. Here’s how the deduction works—and why your regular paycheck can affect the calculation.

You finish your shift, come home, and start working again—this time for yourself.

Maybe you build websites, sell handmade products, maintain lawns, or take photography bookings on weekends. The money might cover household bills. The business might be something you eventually want to do full time.

Calling it a “side business” does not make it less of a business for tax purposes.

Eligible owners can claim the qualified business income deduction, commonly called QBI or Section 199A. It generally allows a deduction of up to 20% of qualifying business income, subject to limits. Sole proprietors and owners of qualifying pass-through businesses can benefit.

The deduction is now permanent under current law, and changes taking effect in 2026 give smaller active businesses another reason to review their eligibility before filing.

At a glance

Question	Quick answer
Can a side business qualify?	Yes. Working part time does not automatically disqualify a qualifying business.
Do I need an LLC?	No. Eligible sole proprietors can claim QBI too.
How much can I deduct?	Generally up to 20% of qualified business income, subject to applicable limits.
What changed?	The scheduled expiration was removed, a minimum deduction was added, and certain phase-in ranges were expanded.
What is the new minimum?	A $400 deduction for eligible taxpayers with at least $1,000 in aggregate QBI from active qualified businesses.
Is that a $400 refund?	No. A deduction reduces taxable income; the savings depend on your tax situation.

The minimum deduction and expanded phase-in ranges apply to tax years beginning after December 31, 2025. For calendar-year taxpayers, that means the 2026 return generally filed in 2027.

Your business does not have to replace your regular job

A cleaning service operated on Saturdays, an online shop managed after work, or a freelance business with a handful of clients may qualify.

What matters is whether the activity is a qualifying trade or business and whether the owner meets the applicable tax requirements.

Employee wages do not qualify as business income for this deduction. Keeping your regular job, however, does not automatically prevent a separate business from qualifying. Income earned through a C corporation is also excluded.

That makes QBI relevant to people who are building a business gradually, without giving up the stability of a paycheck.

What changed for 2026?

The 20% deduction is not new. It has been available for tax years beginning after 2017.

The newer story is what the legislation enacted July 4, 2025, changed.

The deduction’s scheduled expiration was removed

QBI had been scheduled to expire after 2025. The law made it permanent under current law.

For eligible owners, that means the deduction continues beyond its original expiration date. It does not mean the rules can never change again.

Certain active owners can qualify for a $400 minimum deduction

Beginning in 2026, eligible taxpayers with at least $1,000 in aggregate QBI from active qualified trades or businesses can qualify for a minimum $400 deduction.

An active qualified business is one in which the taxpayer materially participates under the applicable tax rules. Simply owning a business does not establish material participation.

The $400 is a minimum—not an extra amount automatically added to the normal deduction. It also applies at the taxpayer level, rather than separately to every business.

Material participation is a condition of this new minimum. It is not a blanket requirement for the ordinary QBI deduction.

If the entire $400 deduction offsets income otherwise taxed at 22%, the federal income tax savings would be approximately $88.

The phase-in ranges for higher-income restrictions expanded

Additional restrictions begin applying above certain taxable income thresholds. The 2025 law expanded the ranges over which these restrictions phase in.

For 2026:

Filing status	Restrictions begin phasing in above	Phase-in range
Single, head of household, and most other returns	$201,750	$75,000
Married filing jointly	$403,500	$150,000
Married filing separately	$201,775	$75,000

These figures concern taxable income before the QBI deduction—not business sales or side business profit alone.

Crossing a threshold does not automatically eliminate the deduction. The outcome depends on factors including the type of business, wages it pays, and qualifying property it holds.

What could the deduction mean for a side business?

Consider a hypothetical owner with $20,000 in qualified business income from a weekend service business.

Assuming the owner qualifies and no applicable limits reduce the deduction:

Item	Illustrative amount
Qualified business income	$20,000
QBI deduction at 20%	$4,000
Federal income tax savings if the entire deduction offsets income taxed at 22%	$880

The $4,000 is the deduction. The $880 is the illustrative tax savings.

This example starts with qualified business income after applicable adjustments. It does not assume that $20,000 in customer payments automatically produces a $4,000 deduction.

QBI generally reflects qualifying income after business expenses and other applicable adjustments. The deductible portion of self-employment tax, self-employed health insurance deductions, and certain retirement contributions can affect the calculation.

Key takeaway: Calculate the benefit from qualified income, not gross sales. A business’s receipts, net profit, and QBI can be different numbers.

Why “up to 20%” matters

The ordinary deduction is generally subject to an overall limit of 20% of taxable income before the QBI deduction, minus net capital gain. Business losses and other restrictions can also affect the result.

For eligible active owners, the new minimum deduction can provide a $400 floor when the otherwise calculated deduction is smaller.

This is why multiplying business profit by 20% is a starting estimate rather than a complete tax calculation.

Do you need an LLC to claim QBI?

No. A qualifying sole proprietor can claim the deduction without forming an LLC.

An LLC’s federal tax treatment matters. A single-member LLC is generally disregarded as separate from its owner for federal income tax purposes unless it elects another treatment. An LLC with multiple members is generally treated as a partnership unless it elects corporate treatment.

Forming an LLC does not automatically make income eligible for QBI. Likewise, electing S corporation treatment does not guarantee a larger deduction. For example, reasonable compensation paid to an S corporation owner is excluded from QBI.

A structure decision should consider ownership, liability concerns, state requirements, administrative costs, and the overall tax picture.

Pro tip: Before changing your business’s tax treatment, ask your tax professional to compare the total cost—including taxes, payroll, and filing requirements.

Is your side activity a business or a hobby?

Selling something occasionally does not automatically establish a business. Enjoying what you do does not automatically make it a hobby, either.

The IRS considers several factors, including whether you operate in a businesslike manner, maintain records, devote time and effort to profitability, and change methods to improve results. No single factor decides the outcome.

Someone who occasionally sells a craft project may have a different tax situation from someone who sets prices, markets products, tracks expenses, and works consistently toward a profit.

Useful habits include:

• Recording sales and expenses throughout the year.
• Keeping receipts, invoices, and customer agreements.
• Reviewing whether prices cover costs.
• Documenting changes made to improve profitability.
• Keeping business transactions easy to distinguish from personal spending.

A separate account can make recordkeeping easier, but no single practice establishes that an activity qualifies.

Your paycheck can affect the deduction—even though it does not qualify

For side business owners, this is an easy detail to overlook.

Your wages are excluded from QBI, but they can contribute to the taxable income used to determine whether additional restrictions apply. A spouse’s income can matter when filing jointly.

At higher incomes, certain service businesses—including consulting, law, and health services—face restrictions that can reduce or eliminate their deduction. Other businesses may face limits based on wages and qualifying property.

A small consulting business is not automatically excluded. But a modest side business profit does not guarantee the full deduction when the owner’s overall taxable income is high.

What to do before year-end

Get your records in order. Reconcile sales and expenses with bank statements, payment platforms, and invoices. Taxable business income must be reported even when no information return, such as a Form 1099, arrives.

Confirm how your business is taxed. Know whether you report as a sole proprietor, through a partnership, or under a corporate election.

Review your entire income picture. Your regular job and, when filing jointly, your spouse’s income may affect the calculation.

Ask about the new minimum. If you have a smaller active business, ask whether you meet the requirements for the $400 floor.

Request a QBI review. Bring your tax preparer a direct question: “Does my side business qualify, and which adjustments or limits affect my deduction?”

Frequently asked questions

Can I claim QBI while working full time?

Yes, if your separate business qualifies. Your employee wages are excluded from QBI, but they can affect the income thresholds used in the calculation.

Can I claim QBI if I take the standard deduction?

Yes. Eligible taxpayers can claim it whether they take the standard deduction or itemize.

Does QBI reduce self-employment tax?

No. It reduces federal taxable income for income tax purposes. It does not reduce the net earnings used to calculate self-employment tax.

Is the new $1,000 threshold based on sales?

No. It is based on aggregate qualified business income from active qualified businesses.

Do I receive $400 for each business?

No. The minimum applies at the taxpayer level. It is a deduction, not a payment or an additional deduction for each business.

When do I claim the 2026 changes?

Calendar-year taxpayers generally apply them on their 2026 federal income tax return filed in 2027. Different rules apply to the 2025 tax year.

What this means for your side business

Your side business may only operate after work or on weekends, but its income still deserves careful attention.

Before filing your 2026 return, bring your income and expense records to your tax preparer and ask two questions: Does this business qualify for QBI, and does the new minimum deduction apply?

You put time into earning that money. Understanding the deduction helps you avoid paying more federal income tax than you owe.

Official resources

• IRS: Qualified Business Income Deduction
• IRS: Is That Activity Just a Hobby or a Business?
• IRS: Form 8995 and Current Filing Guidance
• IRS: Taxation of Limited Liability Companies
• IRS: Official 2026 Adjustments—Revenue Procedure 2025-32

This article provides general information about federal tax rules as of October 12, 2026. Eligibility and savings depend on individual circumstances. MyUSACorporation provides business document preparation and filing services, not tax or legal advice.