The new One Big Beautiful Bill Act (OBBBA) gives a big tax boost to small business owners who may be struggling to keep up with their corporate counterparts. The best part: You don’t have to lift a finger to reap the tax rewards.
Specifically, the new law extends the tax deduction for qualified business income (QBI) authorized by the Tax Cuts and Jobs Act (TCJA) and makes it permanent. It also adds several other technical revisions. But, rest be assured, the rules relating to the QBI deduction remain complicated.
[This is part of a Special Series on the tax changes made by the One Big Beautiful Bill Act, which was enacted in July 2025. It includes a wide range of changes to individual and corporate taxes, deductions, credits, forms and other topics, that affect tax filing starting this year into the future.]
Background: The QBI deduction is available to owners of pass-through entitles — such as S corporations, partnerships, and limited liability companies (LLCs) — as well as self-employed individuals. It may also be claimed by estate and trusts.
In brief, QBI represents the owner’s share of items of taxable income and loss passed through from a qualified business without any alternative minimum tax (AMT) adjustments. However, it does not include investment-related items—such as capital gains, interest income or dividends—reasonable compensation and guaranteed payments passed through from the entity.
Now comes the tricky part. First, the QBI deduction is limited to the lesser of 20% of QBI or the greater of:
- 50% of the wages paid to employees on W-2s, or
- 25% of wages plus 2.5% of the basis of the qualified property owned by the business. For this purpose, “qualified property” is tangible property (including real estate) owned and used by the business for production of QBI during the tax year.
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Second, the QBI deduction is subject to a phase-out, based on the owner’s income. If total taxable income is below the lowest threshold, it’s relatively easy to figure out. The business owner is entitled to the full 20% deduction. For 2025 returns, this threshold is $197,300 for single filers and $394,600 for joint filers.
However, if income exceeds either threshold, the ability to claim the QBI deduction depends on the nature of the business. Special rules apply to business owners who are in a “specified service trade or business” (SSTB). This covers people who provide personal services to the public including physicians, attorneys, plumbers, landscapers, accountants, performing artists, and financial service providers. This group forfeits the QBI deduction entirely if income exceeds another set of limits. For 2025, these thresholds are $247,300 for single filers and $494,600 for joint filers.
If the business owner’s income falls between the thresholds stated above, the QBI deduction is reduced under the other restriction, regardless of the owner operates a SSTB or not.
Under the TCJA, the QBI deduction was scheduled to span 2018 through 2025. Now the OBBBA extends it and makes it permanent. In addition, the new law creates a minimum deduction of $400 for an owner with at least $1,000 QBI and raises the phase-out range for limitations from $50,000 to $75,000 for single filers and from $100,000 to $150,000 for joint filers, beginning in 2026. Thus, more taxpayers will be able to lock in a QBI deduction.
This is one of the most confusing provisions in the tax code and clients are likely to have plenty of questions. Keep them up to date on the latest developments and offer your services, when needed.
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