Impaired functional capacity is a core feature of schizophrenia and presents even in first-episode psychosis (FEP) patients. Impairments in daily functioning tend to persist despite antipsychotic therapy but their neural basis is less clear. Previous studies suggest that volume loss in frontal cortex might be an important contributor, but findings are inconsistent. We aimed to comprehensively investigate the brain structural correlates of functional capacity in FEP using MRI and a reliable objective measure of functioning [University of California, San Diego Performance-Based Skills Assessment (UPSA)]. In a sample of FEP (n = 39) and a well-matched control group (n = 21), we measured cortical thickness, gray matter volume, and white matter tract integrity (fractional anisotropy, FA) within brain regions implicated by previous work. The FEP group had thinner cortex in various frontal regions and fusiform, and reduced FA in inferior longitudinal fasciculus (ILF). In FEP, poorer functional capacity correlated with reduced superior frontal volume and lower FA in left ILF. Importantly, frontal brain volumes and integrity of the ILF were identified as the structural correlates of functional capacity in FEP, controlling for other relevant factors. These findings enhance mechanistic understanding of functional capacity deficits in schizophrenia by specifying the underlying neural correlates. In future, this could help inform intervention strategies.