The Qualified Business Income Deduction Revived Under the One Big Beautiful Bill Act: From Temporary to Permanent

Disclaimer

This article is provided for general informational purposes only and does not constitute legal advice. The information may not reflect the most current legal developments. Readers should not act or refrain from acting based on this material without first seeking advice from qualified legal counsel licensed in the appropriate jurisdiction and familiar with the specific facts of their situation. Viewing or using this material does not create an attorney–client relationship.

The Qualified Business Income deduction, often referred to as the Section 199A deduction, is one of the most consequential individual business tax provisions to come out of the Tax Cuts and Jobs Act of 2017. Originally temporary and scheduled to sunset after tax years beginning December 31, 2025, the OBBBA made it a permanent part of the Internal Revenue Code with important enhancements starting in 2026.

Under the proposed version of the One Big Beautiful Bill Act, the Qualified Business Income deduction increases from 20% to 23%, effective beginning in tax year 2026. However, the final version of the Bill extended the provision but maintained the QBI at 20%. Understanding how it works and how the changes affect planning is essential for owners of pass-through entities, sole proprietors, and other non-corporate business owners.

What the QBI Deduction Was Before OBBBA

Before 2018, there was no general deduction for pass-through business income comparable to Section 199A. Owners of sole proprietorships, partnerships, and S corporations paid individual income tax on their business income at ordinary rates, without any across-the-board deduction tied to business profits.

The Tax Cuts and Jobs Act (TCJA), allowed eligible taxpayers to claim a deduction equal to up to 20 percent of their Qualified Business Income (QBI) for tax years beginning after December 31, 2017 and before January 1, 2026. Eligible taxpayers included individuals, trusts, and estates deriving income from qualified trades or businesses conducted through sole proprietorships, partnerships, S corporations, or certain trusts and estates. The deduction also applied to up to 20 percent of qualified REIT dividends and qualified publicly traded partnership (PTP) income. The OBBBA extends the expiring QBI deduction under Section 199A.

What Qualified Business Income Is (and Isn’t)

Qualified Business Income means the net amount of qualified items of income, gain, deduction, and loss with respect to a qualified trade or business conducted within the United States. This generally includes income from a sole proprietorship or a pass-through entity, reduced by allowable deductions such as the deductible part of self-employment tax, self-employed health insurance deduction, and contributions to qualified retirement plans. It excludes items not related to business operations, such as capital gains or losses, certain dividends, interest not allocable to a trade or business, wages paid to employees, and certain investment income.

In simple terms, QBI reflects the net profit from business operations that is eligible for the Section 199A deduction, subject to statutory rules and limitations.

How the Deduction Worked Before 2026

Before the OBBBA changes, eligible taxpayers could calculate a tentative 20 percent deduction of QBI. However, the actual deduction allowed was subject to several limitations:

1. Taxable Income Limits: For taxpayers below certain thresholds (e.g., ~$197,300 single; ~$394,600 joint for 2025), the deduction was generally available without limitation.

2. W-2 Wage and Qualified Property Limitations: For higher-income taxpayers, the deduction was limited to the greater of (a) 50 percent of the W-2 wages paid by the business, or (b) 25 percent of W-2 wages plus 2.5 percent of the unadjusted basis immediately after acquisition (UBIA) of qualified property.

3. Specified Service Trade or Business (SSTB) Phase-Out: For owners of certain service businesses (e.g., law, consulting, accounting, financial services), the ability to claim the deduction could phase out if taxable income exceeded the thresholds.

The result was that taxpayers with higher incomes or businesses without significant wage or property bases could see a reduced or eliminated deduction.

What Changed Under the One Big Beautiful Bill Act

The OBBBA retained the fundamental structure of the QBI deduction but made several key enhancements, most of which take effect beginning January 1, 2026:

1. Permanence: The QBI deduction is no longer temporary. The sunset scheduled under the TCJA is repealed, and the Section 199A deduction remains part of the tax code indefinitely.

2. Phase-In Range Expansion: The income ranges over which the wage/property limitations and SSTB rules phase in and out were expanded. For example, the range that previously spanned $50,000 for single filers (or $100,000 for joint filers) is increased to $75,000 and $150,000, respectively. This means taxpayers with incomes in a broader middle range will see fewer limitation impacts and may qualify for larger deductions.

3. Minimum Deduction Floor: A statutory minimum QBI deduction of $400 is established for “applicable taxpayers” — generally, those with at least $1,000 of QBI from an active trade or business. This floor ensures that very small business owners can claim a modest deduction even when other limitations would have restricted it. Both the $400 and $1,000 thresholds are indexed for inflation beginning in 2027.

4. Widened Applicability: While the deduction rate itself remains at 20 percent, these expanded phase-in ranges and floors make the deduction more accessible to owners of many pass-through businesses, particularly those near the old limitation thresholds.

What Qualifies as a “Qualified Trade or Business”

For QBI, almost any trade or business other than performing services as an employee qualifies. Pass-through income from partnerships, S corporations, and sole proprietorships passes through to individual returns and is generally eligible. The IRS also treats income from qualified REIT dividends and certain PTP income as eligible, though those components have different limitation rules.

There are important exclusions. Certain investment income, wages paid to employees, and income not connected with the conduct of the business within the United States generally do not count as QBI. A safe harbor may allow rental real estate enterprises to be treated as a qualified business if specific criteria are met, but that classification requires careful documentation and compliance.

Specified Service Trade or Business rules mean that income from certain businesses that depend principally on the reputation or skill of the owners (such as law, health, accounting, consulting, and financial services) may be limited or disqualified above income thresholds, though the expanded phase-in range under the OBBBA mitigates that effect for many taxpayers.

Practical Examples

Example 1: Sole Proprietor Below Threshold. A Schedule C taxpayer with $150,000 of QBI in 2026 and total taxable income below the SSTB phase-out range can claim a straightforward 20 percent deduction, reducing taxable income by $30,000. Because the expanded phase-in ranges apply, the potential limits based on wages or property do not bite.

Example 2: High-Income Professional. An owner of a law practice with taxable income above the SSTB limits may see the QBI deduction reduced, but the broader phase-in range under the OBBBA means more of the deduction is preserved compared to the narrower pre-2026 phase-in. The $400 minimum also ensures a baseline deduction if QBI exceeds $1,000.

Example 3: Multi-Entity Owner with PropertyA taxpayer with interests in an S corporation that has significant W-2 wages and qualified property will benefit under both the wage/property limitation formula and the expanded phase-in range. With the permanent deduction and expanded thresholds, the deduction often remains available even as income fluctuates.

Why This Matters for Tax Planning

The permanence of the QBI deduction removes uncertainty from long-term planning without having to contemplate “what happens in 2026?” The expanded phase-in range reduces cliff effects that previously discouraged income generation just above threshold amounts. The minimum deduction floor benefits smaller businesses that previously might have lost the deduction entirely due to limitation mechanics.

However, because the deduction interacts with other provisions (such as taxable income, W-2 wages, property basis, and SSTB definitions), it is no longer enough to know that a taxpayer “has QBI.” Proper planning involves modeling the interaction of income, wages, capital investment, and ownership structure to maximize the deduction over time.

For questions about how these tax changes may impact your business or real estate holdings, or if there are additional provisions of the OBBBA you would like addressed in our posts, VAdam Law is available to assist and would like to hear from you. Consultations may be scheduled on our online scheduling portal or by calling at (954) 451-0792.