Can a lawyer take the 20% qualified business income deduction?

Yes, but only at lower incomes. Law is a "specified service trade or business" under section 199A, so a lawyer gets the full deduction only if taxable income is at or below the threshold, which for 2026 is $403,500 on a joint return and $201,750 for most other filers; it phases out completely at $553,500 and $276,750. The 2025 tax law made the deduction permanent, widened the phase-out and added a $400 minimum for 2026.

Because the phase-out turns on taxable income, not on the firm's profit alone, the answer can change from one year to the next and with decisions about salary and retirement contributions. Planning for it is part of Kathryn Meyer's work on tax planning for law firms.

How the deduction is figured for a lawyer, step by step

1. Start with qualified business income from the practice. The IRS QBI deduction page says it is available to owners of sole proprietorships, partnerships, S corporations and some trusts and estates. Income earned through a C corporation, or as an employee, is not eligible.
2. Take out pay for your own services. Section 199A(c)(4) excludes reasonable compensation an S corporation pays you and guaranteed payments a partnership pays you for services. The IRS page adds that the deductible part of self-employment tax, self-employed health insurance and retirement plan contributions generally reduce QBI.
3. Find your taxable income before the deduction. Section 199A(e)(1) measures taxable income without regard to the QBI deduction itself. On a joint return, a spouse's income counts.
4. Compare it with the threshold for your filing status and year. At or below the threshold, the practice is treated like any other qualified business.
5. Inside the phase-in range, apply the "applicable percentage." Under section 199A(d)(3), only that percentage of the practice's income, W-2 wages and qualified property counts. The W-2 wage limit in section 199A(b)(2) also phases in.
6. Above the range, the practice drops out. A law practice is no longer a qualified trade or business, so its income produces no deduction.
7. Apply the overall cap. The total deduction cannot exceed 20 percent of taxable income minus net capital gain, increased by qualified dividends (Instructions for Form 8995).
8. Check the 2026 minimum. Under section 199A(i), a taxpayer with at least $1,000 of QBI from active qualified businesses in which they materially participate gets at least $400.

The thresholds for 2025 and 2026

The amounts are adjusted for inflation each year, and the 2025 law widened the phase-in range starting in 2026. Use the table for the year of the return you are working on.

Why law is a specified service business

Section 199A(d)(2) borrows the list in section 1202(e)(3)(A), which names services in the field of law along with health, accounting, consulting and others. The regulations, at Treas. Reg. 1.199A-5(b)(2)(iii), define the field of law as legal services performed by lawyers, paralegals, legal arbitrators, mediators and similar professionals in that capacity. Services that do not require skills unique to law, such as printing, delivery or stenography, are not in the field.

Two regulatory rules close the obvious workarounds. A business with gross receipts of $25 million or less is not a specified service business if less than 10 percent of its receipts come from the specified field, but a law practice almost always fails that test. And under Treas. Reg. 1.199A-5(c)(2), a separate business that provides property or services to a law practice with 50 percent or more common ownership is treated as a specified service business to that extent, so moving the office building or the staff into a sister company does not by itself convert that income.

What the 2025 law changed

Publication 334 (2025) explains that section 70105 of Pub. L. 119-21 makes the 20 percent QBI deduction permanent; before the change, section 199A did not apply to tax years beginning after December 31, 2025. The statute's amendment notes show the phase-in range was widened from $50,000 ($100,000 joint) to $75,000 ($150,000 joint), effective for tax years beginning after December 31, 2025. Rev. Proc. 2025-32 confirms the new $400 minimum deduction and the $1,000 QBI floor for tax years beginning after December 31, 2025, with both amounts indexed for inflation after 2026. The IRS page adds that an active qualified trade or business is one in which the taxpayer materially participates, meeting any one of the tests in Treas. Reg. 1.469-5T(a).

What changes the answer

• Filing status and household income. On a joint return, a spouse's wages or investment income can push the couple into or past the range, even if the practice's profit is unchanged.
• Your S corporation salary. Reasonable compensation is excluded from QBI under section 199A(c)(4), but it also counts as W-2 wages for the wage limit; the salary still has to be reasonable for your work, as explained in how much salary a law firm owner should take from an S corporation.
• Partnership structure. Guaranteed payments for services are excluded from QBI; a partner's distributive share can qualify.
• Staff wages inside the range. Section 199A(b)(2) limits the deduction to the greater of 50 percent of W-2 wages, or 25 percent of W-2 wages plus 2.5 percent of qualified property; between the threshold and the top of the range, that limit phases in.
• Deductions that lower taxable income. Business expenses and retirement contributions reduce QBI, and they also reduce the taxable income that decides where you fall; see which law firm expenses are deductible.
• Capital gains. The overall cap of 20 percent of taxable income is figured after subtracting net capital gain, so a large gain in the same year can limit the deduction.
• California firms. State elections are a separate question; see whether a California law firm should elect the pass-through entity elective tax.

For example: a solo practice in the middle of the range

For example, imagine a married lawyer filing jointly who practices as a sole proprietor. In 2026 the practice has $300,000 of qualified business income after the adjustments for self-employment tax and retirement contributions, it pays $120,000 in W-2 wages to two staff members, and the couple's taxable income before the deduction is $478,500. That is $75,000 above the $403,500 threshold, halfway through the $150,000 range, so the applicable percentage is 50 percent. Only $150,000 of the income and $60,000 of the wages count. Twenty percent of $150,000 is $30,000, and the wage limit, 50 percent of $60,000, is also $30,000, so it does not reduce the result further. The deduction is $30,000, half of the $60,000 that 20 percent of the full $300,000 would produce, and well under the overall cap of 20 percent of $478,500, assuming no capital gains. Had their taxable income been $553,500 or more, the practice would have produced no deduction at all. This is a hypothetical, not a real case.

Common mistakes with the QBI deduction

• Assuming lawyers never qualify. Below the threshold, the full deduction is available, and partial relief applies in the range.
• Using last year's numbers. The 2026 thresholds and range widths differ from 2025.
• Cutting S corporation salary to raise QBI. An unreasonably low salary is an audit risk of its own, and it can reduce the W-2 wages that support the deduction inside the range.
• Forgetting the spouse. Joint taxable income, not the practice's profit, decides the phase-out.
• Counting on the $400 minimum. It is measured by QBI from active qualified businesses, and above the range a law practice is not a qualified business, so on our reading of section 199A(i) it does not restore the deduction for a high-income lawyer.
• Moving functions into a sister company. The common-ownership rule in Treas. Reg. 1.199A-5(c)(2) can treat that income as specified service income too.

What to do this week

1. Project your 2026 taxable income before the QBI deduction, including a spouse's income if you file jointly.
2. Place it against the 2026 threshold and range for your filing status.
3. If you are in or near the range, total the practice's W-2 wages and the unadjusted basis of its qualified property.
4. If the firm is an S corporation, check that the owner's salary is documented as reasonable.
5. Review planned retirement contributions and large year-end expenses with the range in mind.
6. Adjust your remaining estimated payments to match; see how a law firm owner should handle quarterly estimated taxes.

Frequently asked questions

Do I have to itemize to claim it?

No. The IRS says the deduction is available whether you itemize on Schedule A or take the standard deduction. It is claimed on your individual return.

Can an associate paid on a W-2 take the deduction?

No. Section 199A(d)(1)(B) excludes the trade or business of performing services as an employee, so wages from a firm do not qualify.

What if my firm is a C corporation?

Income earned through a C corporation is not eligible. Whether another structure makes sense is a broader question; see Tax-Smart Lawyering on the S corporation election.

Which form do I file?

For 2025 returns, the Instructions for Form 8995 say to use Form 8995 if taxable income before the deduction is at or below the threshold and you are not a patron of a specified cooperative. Otherwise you use Form 8995-A, and a lawyer inside the phase-in range completes its Schedule A.

Does a mediation or arbitration practice count as law?

The regulation includes legal arbitrators and mediators performing services in that capacity, so a mediation practice is generally in the field of law. Whether a particular activity is a separate trade or business depends on its facts.

What if I claimed too much in a prior year?

An overstated deduction can be corrected on an amended return before the IRS raises it; the choices are explained in how to correct a past tax mistake.

Planning around the phase-out

The phase-out rewards planning done before December, not after. Kathryn Meyer spent more than two decades in the IRS Office of Chief Counsel and can review where your firm and household fall for 2026. Qualified business income deduction planning is the fourth-quarter focus of the Quarterly Tax Health Checkup. Contact the firm or call (571) 560-8674.

Sources

• 26 U.S.C. 199A, Qualified business income
• 26 U.S.C. 1202(e)(3), Qualified trade or business
• 26 CFR 1.199A-5, Specified service trades or businesses
• Rev. Proc. 2025-32 (2026 inflation adjustments)
• IRS, Qualified business income deduction
• IRS Publication 334 (2025), Tax Guide for Small Business
• IRS, Instructions for Form 8995 (2025)