Pass-Through Business Deduction (QBI)
The 20% Qualified Business Income deduction is now permanent under the OBBB Act — the biggest win for small business owners.
What Changed Under OBBB
The Qualified Business Income (QBI) deduction under Section 199A was originally created by the Tax Cuts and Jobs Act in 2017 — but it was set to expire after 2025. The OBBB Act, signed July 4, 2025, made it permanent and added key enhancements starting in 2026:
Permanent at 20%
The deduction continues at the same level indefinitely — no sunset, no uncertainty.
$400 Minimum Deduction (New)
If you have at least $1,000 of active QBI, you get a minimum $400 deduction — even if 20% of your QBI is less. Inflation-adjusted after 2026.
Wider Phase-In for MFJ Filers
Phase-in range expanded from $100K to $150K for married filing jointly. The 2026 phaseout range is now $394,600–$544,600 (was $394,600–$494,600).
Who Qualifies
✅ Eligible Business Types
- Sole proprietorships (Schedule C filers)
- Partnerships (Form 1065)
- S-corporations (Form 1120-S)
- LLCs taxed as pass-throughs
- Trusts and estates with QBI
❌ Not Eligible
- C-corporations (taxed at entity level)
- W-2 wages (not business income)
- Investment income (capital gains, dividends)
- Foreign business income
- Reasonable compensation (S-corp salary)
How the Math Works
The QBI deduction equals the lesser of:
- 20% of your Qualified Business Income, OR
- 20% of your taxable income (before the QBI deduction, minus net capital gains)
Example: Freelance Consultant
Effective Tax Rate Impact
Without QBI deduction, pass-through income is taxed at your marginal rate (up to 37%). With the deduction, the maximum effective rate drops to 29.6% — a permanent 7.4 percentage point advantage over C-corp shareholders who face double taxation.
SSTB Rules (Service Businesses)
Specified Service Trades or Businesses (SSTBs) face income-based limitations on the QBI deduction. The good news: OBBB widened the phase-in range, so more service professionals qualify.
SSTB Industries
2026 Phase-Out Thresholds
| Filing Status | Full Deduction Below | Phase-Out Range | No Deduction Above |
|---|---|---|---|
| Single / HoH | $197,300 | $197,300 – $272,300 | $272,300 |
| Married Filing Jointly | $394,600 | $394,600 – $544,600 | $544,600 |
* Phase-out range for MFJ expanded from $100K to $150K under OBBB — more service professionals now qualify for a partial deduction.
W-2 Wage & Property Limitations
Above the income thresholds, the QBI deduction is limited to the greater of:
This means businesses that pay significant wages or own substantial depreciable assets can claim larger deductions even at higher income levels.
Tax Planning Strategies
Income Management
Stay below SSTB thresholds by timing income recognition, maximizing retirement contributions (SEP-IRA, Solo 401k), or using charitable deductions to reduce taxable income.
Entity Structure Review
With QBI now permanent, the S-corp vs. sole proprietorship analysis has long-term implications. S-corp owners should optimize the split between reasonable salary and distributions.
Real Estate Investors
Rental income can qualify as QBI under the safe harbor (250+ hours of rental services annually). Real estate professionals often benefit significantly from the property basis component.
Aggregate or Separate?
If you own multiple businesses, aggregating them under IRC §199A(b)(6) can help meet W-2 wage limitations by combining wage-heavy and wage-light entities.
Frequently Asked Questions
Is the QBI deduction permanent now?
Yes. The One Big Beautiful Bill Act (OBBB), signed July 4, 2025, made the 20% Qualified Business Income deduction permanent. It was originally set to expire after 2025 under the Tax Cuts and Jobs Act.
What changed about the QBI deduction under OBBB?
Three key changes: (1) The deduction is now permanent at 20%, (2) a new minimum deduction of $400 applies for taxpayers with at least $1,000 of active QBI, and (3) the phase-in range for married-filing-jointly taxpayers expanded from $100,000 to $150,000, widening the 2026 phaseout range to $394,600–$544,600.
Do S-corps and partnerships qualify for the QBI deduction?
Yes. Owners of S-corporations, partnerships, sole proprietorships, and LLCs taxed as pass-through entities can claim the QBI deduction. C-corporations are not eligible because they are taxed separately from their owners.
Can doctors, lawyers, and consultants claim the QBI deduction?
Yes, but with limitations. These are classified as Specified Service Trades or Businesses (SSTBs). The deduction begins phasing out at $197,300 (single) or $394,600 (married filing jointly) of taxable income. Under OBBB, the phase-in range is now wider, so more SSTB owners qualify for a partial deduction than before.
What is the new $400 minimum QBI deduction?
Starting in 2026, if you have at least $1,000 of qualified business income, you are guaranteed a minimum deduction of $400 even if 20% of your QBI would be less than that. This amount will be adjusted for inflation in future years.
How much can I save with the QBI deduction?
The QBI deduction reduces your effective tax rate on pass-through income from up to 37% down to 29.6%. For example, if you have $100,000 in qualified business income, you could deduct $20,000, saving $4,400–$7,400 depending on your tax bracket.
Other OBBB Deductions
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