If Congress does not act to extend the valuable Qualified Business Income (QBI) deduction, privately held business owners face the possibility of a significant tax increase. Here’s what you should know as the QBI deduction expiration date looms.

What is the QBI deduction?

Tax law provides that net taxable income from pass through business entities (sole proprietorships, partnerships, LLCs, and S corporations) is passed through to owners and taxed at the owner level at standard individual tax rates.

December 2017’s Tax Cuts and Jobs Act, or TCJA, established a new deduction based on a non-corporate owner’s qualified business income, or QBI.

This deduction generally allows eligible owners to deduct up to 20% of their QBI. It applies to individual owners of sole proprietorships, rental properties, S corporations, and partnerships. Additionally, entities such as S corporations, partnerships, or trusts that own an interest in a pass-through entity may also qualify for the deduction.

Looming expiration of the QBI deduction: what you should know

The QBI deduction is scheduled to expire at the end of 2025 unless Congress extends it.

Without the QBI deduction, business owners may face a substantial increase in their federal income tax rates. The marginal rate could rise from 29.6% to 39.6%, leading to higher tax liabilities and, in some cases, a $100,000 increase in taxes for business owners with significant qualified income.

What should businesses do to prepare?

Tax should never be the sole consideration when making business decisions, but to prepare for the potential sunset of the QBI deduction, business owners will want to consult their tax advisors and consider a few strategies like:

• Accelerate Income: Complete projects or bill clients early to take advantage of the deduction before it expires.
• Defer Expenses: Delay claiming large deductions, like equipment purchases, until after 2025 to offset higher future tax rates.
• Take Advantage of Tax Credits: Explore opportunities like R&D credits or energy efficiency incentives to offset higher tax liabilities.
• Spread Out Deductions: If possible, time expenses like repairs or marketing costs to fall into higher-tax years.
• Leverage Depreciation Timing: Opt for depreciation methods that allow you to claim deductions over multiple years instead of all upfront.
• Reviewing tax structures- It might be worth considering converting to a C corp structure, consolidating entities or restructuring.

Wondering how you can maximize tax savings in 2025? Check out more details in our Year End Tax Planning Guide for Businesses.