The QBI Deduction Is Now Permanent: Time for a Fresh Look
When the Internal Revenue Code Section 199A qualified business income (QBI) deduction was first enacted, it was scheduled to expire after 2025. Last summer’s One Big Beautiful Bill Act (OBBBA) changed that, making the 20% deduction a permanent part of the tax code.
Of course, the tax code could always change again in the future, but for now the QBI deduction is no longer a temporary provision. That’s why it’s important for business owners to reaffirm they are applying it correctly—and strategically.
QBI Basics
Section 199A allows sole proprietors and the owners of pass-through entities such as partnerships, S corporations and limited liability companies (LLCs) to deduct up to 20% of their qualified business income on their individual tax returns. Certain trusts and estates are also eligible.
Qualified business income generally refers to net income from a domestic trade or business, and excludes capital gains, investment income and wage income or guaranteed payments from a partnership or LLC. The amount of QBI that is eligible for the deduction is reduced by contributions to owners’ health insurance and qualified retirement plans, and one-half of self-employment tax.
Keep in mind that the business itself does not take the QBI deduction—it’s taken on each owner’s individual return and capped at 20% of taxable income excluding capital gains. Thus, even if pass-through owners or partners receive identical shares of a company’s profits, their QBI deductions can vary.
Income Limits
Section 199A imposes additional limits on the QBI deduction for higher-income taxpayers. Once the total taxable income on a taxpayer’s personal return exceeds the threshold amount, these limits start to phase in, and the amount of the deduction is reduced.
For the 2025 tax year, the threshold amount is $394,600 for joint filers or $197,300 for single filers. The phase-in range is $100,000 for joint filers and $50,000 for others. The thresholds are indexed for inflation so they will be higher for 2026. Beginning with the 2026 tax year, the OBBBA also expanded the phase-in ranges to $150,000 for joint filers and $75,000 for others—in essence, giving higher-income business owners a little more “breathing room” as the limits are phased in.
Above those thresholds, taxpayers are subject to two types of QBI deduction limitations. The first is based on the total W-2 wages the business pays and the unadjusted basis immediately after acquisition (UBIA) of certain qualified property it owns. This can greatly reduce the value of the deduction for a business that is highly profitable but pays relatively low wages.
Fortunately, there are ways to retain more of the deduction. A business that owns significant depreciable property might be able to use an alternative calculation method the IRS allows to offset the wage limitation’s impact. In addition, high-income taxpayers who own multiple businesses can sometimes aggregate their businesses for Section 199A purposes (provided they meet certain qualifications), so that the combined wage base supports a larger QBI deduction. Aggregation is not automatic, however, and requires a formal election.
The second type of limitation applies to high-income owners of specified service trades or businesses (SSTBs), including healthcare, law, accounting, consulting, financial services and certain other businesses. For these owners, the QBI deduction starts phasing out once taxable income exceeds the threshold amount and is fully phased out at the top of the range.
Here again, there are some alternative strategies. For example, some SSTBs have both service and non-service components, such as a medical practice that also sells related healthcare products. If the non-service activity operates as a distinct business with separate accounting, that income could qualify for the QBI deduction, even if the core service activity income has been phased out. This requires careful structuring and documentation, but it illustrates how important it is to revisit underlying issues now that the QBI deduction is permanent.
Real Estate Issues
Generally, rental income qualifies for the QBI deduction if it rises to the level of a trade or business. Lease terms and owner involvement are key—a passive triple-net lease arrangement, standing alone, might not qualify. The IRS published a safe harbor procedure to help determine qualifying activities.
Section 199A makes a specific provision for self-rental activities, such as an operating business that rents property from its owner’s real estate company. If the operating and rental businesses share at least 50% common ownership, the rental income can be included in the QBI calculation.
A separate component of Section 199A allows up to a 20% deduction on dividends from qualified real estate investment trusts (REITs) and income from qualified publicly traded partnerships (PTPs). Significantly, taxpayers can claim this 20% deduction even if they have no QBI from a trade or business. It is also not subject to the income phaseout limitations.
A Strategic Approach
To make the most of the QBI deduction, it is important to consider the owner’s overall tax profile. For example, paying lower W-2 wages to an S corporation shareholder could increase the QBI but also trigger wage-based limitations for a high-income owner. Conversely, higher W-2 wages could reduce QBI but increase the necessary wage base.
Similarly, accelerated depreciation—such as Section 179 expensing or bonus depreciation—reduces net business income and generates immediate tax savings, but it also reduces the QBI deduction, potentially making the tax savings less beneficial.
Moreover, Section 199A does not exist in a vacuum. Strategies to maximize the QBI deduction often affect other aspects of the business, including such fundamental issues as entity structure, compensation, real estate ownership, capital investments and retirement planning. Careful modeling of alternatives is essential to making the best choices.
Now that the QBI deduction is permanent, it deserves a fresh review. Thorough analysis may reveal opportunities or limitations that were not apparent when the deduction was still temporary.
Please contact us if you would like to discuss your QBI strategy.
