The Tax Cuts and Jobs Act of 2017 (TCJA) established a new tax deduction that allows many owners of pass-through businesses to reduce their taxable income by as much as 20% of their “qualified business income” (QBI). However, under the TCJA, the QBI deduction was scheduled to expire after 2025, creating uncertainty for these taxpayers. The One Big Beautiful Bill Act (OBBBA) now makes the deduction permanent and enhances it for some taxpayers. 

Why It Matters

The permanent QBI deduction under OBBBA provides long-term tax certainty for pass-through business owners. By expanding eligibility and introducing a minimum deduction, more business owners can reduce taxable income, lower their overall tax bill, and plan future growth with confidence.

How the Deduction Works

The Section 199A QBI deduction generally allows eligible owners of sole proprietorships, partnerships, S corporations and most limited liability companies to deduct up to 20% of their QBI, meaning the net amount of income, gains, deductions and losses. Reasonable compensation, certain investment items and payments to partners for services rendered are excluded from QBI. The deduction is available to both itemizers and non-itemizers.

The deduction is subject to various limitations, however. The wage and investment limit begins to phase in when your taxable income exceeds the specified threshold amount. Once your taxable income exceeds the phase-in range for the tax year, your QBI deduction generally is limited to the greater of your allocable share of:

• 50% of the business’s W-2 wages, or
• 25% of the W-2 wages plus 2.5% of the unadjusted basis immediately after acquisition (UBIA) of qualified business property (generally, the purchase price of tangible depreciable property held at the end of the tax year). 

Under the TCJA, the phase-in range extends from the taxable income threshold over the next $100,000 of taxable income for married couples who file jointly and the next $50,000 of taxable income for other taxpayers. For 2025, the phase-in ranges are:

• $394,600 to $494,600 for married couples who file jointly, and
• $197,300 to $247,300 for other taxpayers.

The specified service trades or businesses (SSTBs) limit applies the same phase-in ranges. But, for SSTBs, no QBI deduction is allowed if taxable income exceeds the upper limit of the range.

OBBBA Enhancements

In addition to making the QBI deduction permanent, the OBBBA expands the phase-in ranges from $100,000 to $150,000 for married couples who file jointly and from $50,000 to $75,000 for other taxpayers, beginning in 2026. For 2026, the taxable income phase-in ranges will be:

•  $403,500 to 553,500 for married couples filing jointly, and
• $201,750 to $276,750 for all other taxpayers.

Although the OBBBA limits itemized deductions for high-income taxpayers, the statute clearly states that taxable income for purposes of the QBI deduction is determined without regard to that limit. 

As a result, some owners of SSTBs and pass-through businesses subject to wage and investment limits may have larger deductions going forward. The former might now qualify for a QBI deduction they couldn’t claim under the TCJA, while the latter may have larger deductions than they otherwise would.

Plus, the OBBBA creates a new inflation-adjusted minimum QBI deduction of $400 for taxpayers with at least $1,000 of QBI from one or more active businesses in which they materially participate. You materially participate in a business when you have regular, continuous and substantial involvement in its operations. The minimum deduction becomes available in 2026, and the deduction amount and the QBI threshold will be adjusted annually in the following years.

The new law contains numerous other business-related tax provisions. Check out our OBBBA Resource Center for all the latest information.