Anthony McVeigh, MSA, CPA •
The Qualified Business Income (QBI) deduction under Section 199A was originally enacted with the 2017 Tax Cuts and Jobs Act (TCJA) and was set to expire at the end of 2025. The QBI deduction allows up to 20% of qualified business income and qualified real estate investment trust (REIT) dividends to be deducted. This only applies to sole proprietors and owners of pass-through entities such as partnerships, S corporations, and LLCs taxed as those entities. C corporations are not eligible. This deduction is subject to several limitations, including income thresholds, wage and property tests, and special rules for specified service businesses or SSTBs (like law, health, and consulting).
The Qualified Business Income (QBI) deduction under Section 199A was originally enacted with the 2017 Tax Cuts and Jobs Act (TCJA) and was set to expire at the end of 2025. The QBI deduction allows up to 20% of qualified business income and qualified real estate investment trust (REIT) dividends to be deducted. This only applies to sole proprietors and owners of pass-through entities such as partnerships, S corporations, and LLCs taxed as those entities. C corporations are not eligible. This deduction is subject to several limitations, including income thresholds, wage and property tests, and special rules for specified service businesses or SSTBs (like law, health, and consulting).
Taxpayers with income below certain thresholds can generally take the full deduction. In 2025 the thresholds for single and married filing joint are $197,300 and $394,600, respectively.
Changes under the One Big Beautiful Bill Act (OBBBA)
Permanence of 20% QBI deduction
The most notable change as a result of the One Big Beautiful Bill, is that the deduction no longer expires and is now a permanent part of the tax code.
Expanded phase-in thresholds
QBI rules for SSTBs are subject to phase-in limitations that affect individuals over a certain amount. Originally there was a $50,000 range for single filers and $100,000 for joint filers. However, the new bill has increased the phase-in range to $75,000 for single filers and $150,000 for joint filers and indexes them for inflation after 2026. This will allow more individuals to claim the deduction and for higher-income taxpayers to retain more of their deduction.
New Minimum Deduction for Active Businesses
Introduced in the new bill is a new minimum deduction of $400 for an active business with at least $1,000 in QBI. This minimum will also be indexed for inflation after 2026. The percentage of the deduction from QBI will remain the same. This provision ensures that eligible small business owners will receive a base-level deduction regardless of wage/property calculations.
Core Rules Unchanged
The main rules behind the deduction have not changed. It is still the lesser of 20% of QBI or 20% of taxable income. The wage and property tests still apply, and the deduction is available if you itemize or use standard deduction.
What does this mean going forward?
With the QBI deduction becoming permanent, it provides more stability and allows businesses to factor the deduction into their future planning. Things to consider for your business tax strategy:
The OBBBA updates to the QBI deduction are a clear benefit for pass-through entities and small business owners that allow for more accessibility and predictability of the QBI deduction. Businesses should take this opportunity to revisit their tax strategies and ensure they are positioned to maximize the benefits of this updated provision.
For more information follow us on LinkedIn to stay up-to-date on all of our content or give us a call at 603-224-2000.
Changes under the One Big Beautiful Bill Act (OBBBA)
Permanence of 20% QBI deduction
The most notable change as a result of the One Big Beautiful Bill, is that the deduction no longer expires and is now a permanent part of the tax code.
Expanded phase-in thresholds
QBI rules for SSTBs are subject to phase-in limitations that affect individuals over a certain amount. Originally there was a $50,000 range for single filers and $100,000 for joint filers. However, the new bill has increased the phase-in range to $75,000 for single filers and $150,000 for joint filers and indexes them for inflation after 2026. This will allow more individuals to claim the deduction and for higher-income taxpayers to retain more of their deduction.
New Minimum Deduction for Active Businesses
Introduced in the new bill is a new minimum deduction of $400 for an active business with at least $1,000 in QBI. This minimum will also be indexed for inflation after 2026. The percentage of the deduction from QBI will remain the same. This provision ensures that eligible small business owners will receive a base-level deduction regardless of wage/property calculations.
Core Rules Unchanged
The main rules behind the deduction have not changed. It is still the lesser of 20% of QBI or 20% of taxable income. The wage and property tests still apply, and the deduction is available if you itemize or use standard deduction.
What does this mean going forward?
With the QBI deduction becoming permanent, it provides more stability and allows businesses to factor the deduction into their future planning. Things to consider for your business tax strategy:
- Review how the business pays W-2 wages or holds qualifying property.
- Revisit QBI calculations to see how the new thresholds affect your deduction. You could qualify for a big deduction.
- Analyze your eligibility as a specified service business.
- Evaluate material participation for the new minimum deduction.
- Update long term tax provisions to account for the new changes.
The OBBBA updates to the QBI deduction are a clear benefit for pass-through entities and small business owners that allow for more accessibility and predictability of the QBI deduction. Businesses should take this opportunity to revisit their tax strategies and ensure they are positioned to maximize the benefits of this updated provision.
For more information follow us on LinkedIn to stay up-to-date on all of our content or give us a call at 603-224-2000.
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