Physician practices face a narrow path through Section 199A
The qualified business income deduction, better known as the QBI deduction or Section 199A deduction, remains one of the most important tax provisions for physician owners of pass-through businesses. It allows eligible owners of sole proprietorships, partnerships, S corporations and some trusts and estates to deduct up to 20% of qualifying business income, along with up to 20% of qualified REIT dividends and qualified publicly traded partnership income. For physicians, the practical value lies in how the law treats medical practices as a specified service trade or business, or SSTB, which places income limits around the benefit.
The deduction sits on the individual return rather than the practice return. A medical group organized as an S corporation or partnership does not claim the deduction itself; instead, it reports each owner’s share of QBI, W-2 wages, property basis and SSTB status on the owner’s Schedule K-1 statement. That structure matters because the deduction can be preserved, limited or eliminated based on the owner’s taxable income before the deduction is calculated.
Income thresholds determine whether a physician gets the full deduction
For tax year 2026, the IRS threshold is $403,500 for married couples filing jointly and $201,750 for most other filers. At or below those levels, a physician owner generally can claim the full deduction on practice income. Once taxable income moves above the threshold, the deduction begins to phase in and then narrows until it reaches zero at $553,500 for joint filers and $276,750 for most others.
The mechanics are unforgiving. A physician who crosses the threshold does not lose the deduction all at once, but the gradual reduction can erase much of the tax benefit, especially for higher-earning specialists or multi-physician practices with substantial pass-through income. The policy design reflects a deliberate split in the tax code: medical services qualify as an SSTB, and SSTBs do not receive the same treatment as many non-service businesses once income rises beyond the phase-in range.
A physician employed by a hospital or health system and paid on a W-2 has no QBI from that job. Salary is not qualified business income, and the deduction does not apply to wage income at any income level.
What counts as QBI, and what does not
QBI is the net amount of qualified items of income, gain, deduction and loss from a qualified trade or business, but only items included in taxable income count. Several categories are excluded from the calculation. Capital gains and losses do not count. Certain dividends and interest income do not count either. For physicians, the key exclusions are even more familiar: W-2 wages, reasonable compensation paid by an S corporation to a shareholder and guaranteed payments made by a partnership to a partner are all outside the QBI pool.
This is where entity structure directly affects tax planning. In an S corporation, the physician-owner’s salary is excluded, while the remaining profit that flows through on the K-1 can qualify as QBI. In a partnership, guaranteed payments are excluded, while the partner’s distributive share of profit can qualify. The deduction therefore rewards careful separation of compensation streams, but it does not turn employment income into business income.
Taxpayers may claim the deduction whether they itemize or take the standard deduction. It also does not reduce net earnings from self-employment, so it has no effect on self-employment tax. That distinction is critical for physicians who expect the QBI deduction to lower every federal tax exposure tied to practice income. It does not.
Why medical practices fall inside the SSTB rules
Section 199A defines an SSTB by borrowing from the service-field list used in Section 1202 and trimming that list to include health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services and brokerage services, along with businesses tied to investing, trading and dealing in securities and any business whose principal asset is the reputation or skill of its owners or employees.
The Treasury regulations define the field of health as the provision of medical services by individuals such as physicians, pharmacists, nurses, dentists, veterinarians, physical therapists, psychologists and other similar health care professionals performing services in that capacity. A physician practice that examines, diagnoses and treats patients fits squarely within that definition.
The regulations also draw a line between direct medical care and adjacent commercial activity. Operating a health club or spa does not become medical care simply because wellness is involved. Payment processing is not medical care. Researching, testing, manufacturing or selling pharmaceuticals or medical devices does not become an SSTB just because the end product reaches patients. A company operating outpatient surgical centers and handling administration, but contracting out all medical care, falls outside the health-services definition. So does a senior living operator that provides housing and meals while outsourcing medical services. A pharmacist contractor reviewing orders and filling prescriptions for a rural facility, by contrast, is performing health services.
That boundary has real consequences for group structure, ancillary service lines and ownership models. When a practice crosses from direct care into nonclinical operations, the tax treatment may change with it.
De minimis rules create exceptions, but only in limited cases
The IRS also applies a de minimis rule. A business with gross receipts of $25 million or less is not treated as an SSTB if less than 10% of its gross receipts come from specified service activities. Above $25 million, the cutoff falls to 5%. Once a business exceeds the applicable percentage, it is treated as an SSTB in its entirety.
That rule can matter for larger organizations with mixed revenue streams, but it offers less comfort to physician practices than many owners expect. Medical groups are generally still subject to the health-services classification, and the threshold-based phaseout can be more relevant than the de minimis exception in day-to-day planning. For physicians nearing the income ceiling, entity choice, compensation design and the mix of practice revenue can determine how much of the 20% benefit survives.
Congress made the deduction permanent, but the planning pressure remains
The deduction was created by the 2017 Tax Cuts and Jobs Act for tax years beginning after Dec. 31, 2017, and was originally scheduled to expire after 2025. Public Law 119-21, signed July 4, 2025, made the deduction permanent at 20%, and the current text of Section 199A no longer carries a sunset date. Permanence removes one layer of uncertainty, but it does not simplify the rules physician owners must navigate.
Form 8995 is used by taxpayers whose taxable income before the deduction is at or below the threshold, while Form 8995-A applies to those above it. The more complex form includes a Schedule A for specified service businesses. For physician practices, the administrative path mirrors the substantive rule: once income rises beyond the threshold, the tax computation becomes narrower, more technical and less forgiving.
The practical consequence is blunt. For many physician owners, the QBI deduction is available, but only if income stays within the income bands where the code still allows it. Once the threshold is crossed, the SSTB rules begin to squeeze the benefit, and for higher earners the deduction can disappear entirely.