Understanding the Qualified Business Income Deduction: Changes Under the One Big Beautiful Bill Act
Learn how the Qualified Business Income (QBI) Deduction has been a major tax benefit for small business owners and self-employed individuals under the One Big Beautiful Bill Act.
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American business owners have leveraged the Qualified Business Income Deduction as a tax strategy since the 2017 TCJA. The provision allows up to a 20% deduction of qualified business income, directly lowering the taxable income (Here’s What’s In the ‘One Big Beautiful’ Tax And Spending Bill).
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The recent passage of the One Big Beautiful Bill Act on July 4, 2025, has reshaped the landscape. The act not only made the deduction permanent but also introduced critical modifications. Let’s break down what every business owner needs to know: the original rules, the new One Big Beautiful Bill Act changes, and the long-term planning implications.
What Is the QBI Deduction?
Formally known as IRS Section 199A, the qualified business income deduction is a tax break for pass-through entities. It allows them a deduction of up to 20% of their qualified business income on personal returns.
For those just getting started:
- It reduces your taxable income, not your adjusted gross income (AGI).
- C corporations don’t qualify.
- Owners in Specified Service Trades or Businesses (SSTBs) see their deduction phase out as their income climbs.
Learn more about the differences between C corps and S corps here.
The QBI Deduction Before OBBBA
Under the original TCJA framework, which was set to expire after 2025, the qualified business income deduction operated with specific thresholds and limits.
Full Deduction Income Caps: To claim the full 20% deduction, taxable income needed to be under $197,300 for single filers or $394,600 for married couples filing jointly.
Phaseout and Limitations
The Phaseout Zone: For incomes above those caps, the deduction was subject to complex limitations based on either W-2 wages paid by the business or the unadjusted basis of its qualified property. For SSTB owners, the deduction would phase out entirely above a certain income level.
See other deductions your business may qualify for in our tax deduction cheat sheet.
Sunset Clause
The looming 2025 expiration date, known as the sunset clause, created significant uncertainty, making long-term financial planning a challenge for many. The OBBBA directly addresses this core issue.
Year-end planning strategies often accounted for this uncertainty.
Key Changes to the QBI Deduction Under OBBBA
The One Big Beautiful Bill Act reshapes the playing field for pass-through businesses. The changes are more than just procedural tweaks and can be seen as a substantive win for business owners. Here’s what you need to know about the key One Big Beautiful Bill Act changes effective for the 2025 tax year:
1. Permanent Extension
The qualified business income deduction has been made permanent under the new act. This gives business owners the long-term certainty needed for serious strategic planning and investment.
Here are six more ways proactive tax planning benefits your business.
2. Expanded Phase-In Thresholds
The OBBBA has widened the phase-in windows for the deduction’s limitations, including those for W-2 wages and SSTBs. This creates a much smoother phaseout.
- For single filers, the range expands from $50,000 to $75,000 above the threshold.
- For married couples filing jointly, it jumps from $100,000 to $150,000.
This means your deduction for qualified business income doesn’t drop sharply. It phases out more gradually, letting a broader range of taxpayers retain a significant portion of the benefit.
3. Minimum Deduction Introduced
The law now institutes a guaranteed minimum QBI deduction of $400 for anyone with qualified active business income. This ensures that even the smallest businesses see a tangible benefit.
Have Questions About Qualified Business Income Deduction?
Illustrating the Impact: Before and After OBBBA
Let’s make this concrete. To illustrate, let’s look at a practical example.
The Setup
- Taxpayers: Ana and Luis are filing jointly.
- Business: Ana runs an architecture firm (a Specified Service Trade or Business).
- Her Qualified Business Income: $450,000
- W-2 Wages Paid: $50,000
- Unadjusted Basis of Property: $0 (It’s a service-based operation).
Before OBBBA
(Phase-In Window of $100,000)
- Income threshold for MFJ: $394,600
- Ana’s taxable income: $450,000 (which is $55,400 over the threshold)
- Phaseout percentage:
- (450,000 – 394,600) / 100,000 = 55.4%
- QBI deduction after phaseout:
- 20% x 450,000 x (1 – 0.554) = 90,000 x 0.446 = 40,140
After OBBBA
(Expanded Phase-In Window of $150,000)
- Phaseout percentage recalculated:
- (450,000 – 394,600) / 150,000 = 36.9%
- QBI deduction after phaseout:
- 90,000 x (1 – 0.369) = 90,000 x 0.631 = 56,790
Summary Table
Taxable Income | Phaseout Window | Phaseout % | QBI Deduction Before OBBBA | QBI Deduction After OBBBA |
$450,000 | $100,000 | 55.4% | $40,140 | $56,790 |
$500,000 | $100,000 | 105.4% (fully phased out) | $0 | $23,400 (partial deduction) |
$525,000 | $150,000 | 86.3% | $0 | $12,330 |
Thanks to the expanded phase-in range, Ana can claim a substantially larger deduction across a wider income range.
What Businesses Should Do Right Now
The permanence of the qualified business income deduction demands a proactive strategy. Here’s your playbook:
- Reassess Your Eligibility: Run the numbers. With the wider phase-in windows under the One Big Beautiful Bill Act, your qualified business income deductions could be significantly larger than you thought. Don’t miss out on potential savings.
- Scrutinize Your Business Structure: The deduction’s permanence doesn’t mean your current setup is optimal. Your entity choice, whether S corp, partnership, or sole proprietorship, still directly impacts your final tax liability. This is a great time to re-evaluate that decision. Our entity selection services can help evaluate if you’re structured for maximum tax efficiency.
- Refresh Your Tax Projections: Bake the permanent deduction for qualified business income and its new thresholds directly into your financial models for clarity moving forward.
Long-Term Considerations for Businesses
Smart planning goes beyond this year’s return. To truly maximize the benefit, consider these levers:
- Compensation Strategy: For many, the deduction calculation hinges on W-2 wages. A savvy review of owner compensation and employee payroll can be a powerful tool to unlock a larger QBI deduction.
- Strategic Asset Investment: The unadjusted basis of your qualified property is a key factor. Strategic capital investments can not only grow your business but also serve as a hedge against potential deduction limitations. Learn how cost segregation can accelerate depreciation and improve cash flow.
- Understand Your SSTB Status: If you’re in a specified service trade, knowing exactly where you stand relative to the new income thresholds is critical. For some, a slight reclassification of business activities could have a major impact on eligibility.
Final Thoughts: Strategic Planning Required
The One Big Beautiful Bill Act changes have transformed the QBI deduction from a temporary perk into a cornerstone of tax planning. This isn’t just about compliance; it’s about strategy. The expanded rules offer more businesses a chance to claim this valuable break.
So, if you’re asking ‘What is a qualified business income deduction and how does it help me?’ – the answer is now clearer than ever. It’s a permanent tool in your kit. Partner with your advisor to model these new scenarios and structure your operations to fully capitalize on this benefit for the long haul.
Our tax advisory services can guide you through these new QBI strategies.
FAQ
- Q1: Who qualifies for the Qualified Business Income (QBI) deduction?
A: Owners of pass-through entities like sole proprietorships, partnerships, and S corps may qualify. C corporations are excluded.
- Q2: How much can I deduct under the QBI rules?
A: Eligible owners can deduct up to 20% of qualified business income on their personal tax return, lowering taxable income.
- Q3: What did the OBBBA change about the QBI deduction?
A: The OBBBA made the QBI deduction permanent, expanded income phase-in ranges, and introduced a guaranteed $400 minimum deduction.
- Q4: What is the new minimum deduction under OBBBA?
A: Any taxpayer with qualified active business income now gets at least a $400 QBI deduction, even if income is modest.
- Q5: Do Specified Service Trades or Businesses (SSTBs) still face limits?
A: Yes, but the phaseouts are now more gradual, giving high-income SSTB owners a better chance to keep part of the deduction.
