The One Big Beautiful Bill Breakdown: Qualified Business Income (QBI) Deduction
The Previous Tax Law
The Qualified Business Income (QBI) deduction was designed to allow an owner of a pass-through entity with qualified business income to deduct up to 20% of their income on their personal return from that business. For these owners, the QBI deduction makes the maximum effective rate on that pass-through income 29.6% instead of 37%.
The Qualified Business Income (QBI) deduction under section 199A was enacted in 2017 with the (TCJA) Tax Cuts and Jobs Act. In its original form, it included the tax years beginning after December 31, 2017, and ending on or before December 31, 2025.
Qualified business income is trade or business income that is derived from S corporations, partnerships and sole proprietorships. That income is ultimately reported on an individual’s personal return, Form 1040. The 20% deduction is then applied to a positive amount of QBI sourced income.
There are limitations and phase-outs in place depending on the type of business, amount of taxable income and filing status. For the 2025 tax year, the QBI deduction starts to phase out for a Specified Service Trade or Business (SSTB) at $394,600 of taxable income, for those with the filing status of married filing jointly, and no deduction is allowed when taxable income reaches $494,600.
SSTBs are businesses that perform services focused on the areas of healthcare, law, consulting, investment management and athletics to name a few. Businesses that are not SSTBs and above the threshold can still qualify for the deduction, but the reduction considers W2 wages paid and property of the business in the calculation to adjust the deduction when taxable income exceeds the $494,600 threshold.
New and Final Law Under the One Big Beautiful Bill
The One Big Beautiful Bill made the 20% QBI deduction permanent and expanded the phase-in range for married-filing-jointly taxpayers from $100,000 to $150,000. As a result, the 2026 phaseout range increases from $394,600–$494,600 to $394,600–$544,600 for both SSTBs and non-SSTBs.
The bill also added a minimum deduction of $400 for taxpayers with QBI over $1,000 starting in 2026. That amount will also be adjusted for inflation going forward. The percentage of the deduction from QBI will remain the same.
What It Means for You
Since the bill has made the QBI deduction permanent, this gives businesses more stability and makes year-to-year tax planning easier.
With the expansion of the phase-in range and minimum deduction, more taxpayers are also expected to benefit from this deduction in future years. It’s important to note that there are no changes to QBI in 2025.
If you receive pass-through income or are a sole proprietor and have not qualified for this deduction in the past, it is important to make sure this topic is covered in your tax planning.
To learn more about how the One Big Beautiful Bill and this specific provision may impact you, contact your Warren Averett advisor.
