Among the many changes in the new One Big Beautiful Bill (OBBBA), the Qualified Business Income (QBI) deduction got a permanent upgrade for small business owners. What started with the TCJA temporary provisions has now been placed permanently into action (or until a future congress changes it). While the QBI deduction did not materially change from a calculation standpoint, the new adjustments within the OBBBA have given access to more business owners to take advantage of dozens of thousands in tax deductions.
The Qualified Business Income Deduction
For pass-through entities like Partnerships and S-Corps, Congress has now made permanent a 20% deduction on the profits of the company. Back in 2017, the TCJA created a deduction that would allow business owners under a certain taxable income amount to essentially deduct 1/5 of the business income they received for the year. Some income does not qualify for the deduction, such as income from a C-Corporation or income received as an employee. So, in rough terms, only the profit from your company would be considered for the QBI deduction.
Until July 4th, there was increasing uncertainty because the TCJA set the QBI deduction to expire at the end of 2025. Depending on the level of income, that expiration could have raised our taxes by tens of thousands of dollars next year. Fortunately, that is no longer the case, and business owners who qualify can still benefit.
Since 2017, those who qualified were based on certain income levels that the IRS sets each year. For 2024, those thresholds were $383,900 if married filing jointly, and $191,950 for all other returns. Then, there was a “phase-in range” from $383,900 to $483,900 that gradually eliminated a married couple’s QBI deduction ($191,950 to $241,950 for single filers). That is a $100,000 range for married filing jointly and $50,000 for all other filers. Fortunately, not every business will go to a $0 deduction at this income level, depending on the type of company it is.
The deduction also changes based on whether or not the IRS categorizes a business as a Specified Service or Trade Business (SSTB). If a company is considered an SSTB, once the threshold is completely crossed, then the deduction would be eliminated. If a company were non-SSTB, the threshold would change the formula to calculate the deduction and not eliminate the deduction. Instead of the rough 20% of income, the deduction would change to either 50% of wages or 25% of wages plus 2.5% of depreciable property. The goal here is to simply understand where you fall into these specifics and get your accountant to run the numbers to know exactly how much you could qualify for.
New Rules with the New Bill
The new bill did not update how the QBI deduction is calculated, but it did extend the phase-in window from $100,000 to $150,000 for married filing jointly and from $50,000 to $75,000 for all other filers, starting in 2026. This is significant for certain business owners, because potentially more income can qualify for the deduction. For those who were below the initial limits, not much changed since you still have access to the same 20% discount. However, owners around the $400,000-$600,000 range could gain access to more of the QBI deduction with the right tax planning.
For example, a married couple with only $200,000 in business income can qualify for the QBI deduction. On the surface, that is simply a $40,000 deduction. If the same couple has $500,000 in taxable income, the new tax bill changes the amount they would receive. Previously, they would not have received any QBI deduction (assuming they are an SSTB) since the end of the phase-in window last year was $483,900. However, next year, in 2026, the upper threshold will end at $550,000, potentially qualifying them for a QBI deduction of over $66,000. Simple math tells you that with a rough 35% tax rate, the deduction would save $23,100 in taxes in 2026.
Since more owners are eligible for the QBI deduction, it becomes even more imperative for tax planning from year to year to optimize the deduction. Finding out whether your company is an SSTB is step one, since that will determine your QBI calculation as your taxable income grows through this range. After that, focus on what you can to alter your taxable income to get to a more achievable QBI deduction (if that is the goal).
What To Do Next
Since the bill expanded the window, there will be more owners who need to plan within the window. It is important to note that QBI remains the same this year. Starting in 2026, married couples in the $400,000-$550,000 ($200,000 – $275,000 for single filers) range should take a closer look at their deductions. Those under $400,000 in taxable income do not need to worry, since the same 20% applies if they qualify.
Looking at an example, if we find a married couple with $570,000 in taxable income, they would not qualify for the new QBI deduction if they were an SSTB. However, what if we maxed out a 401k and reduced their income by $70,000, down to $500,000? Then two things would happen: first, they could deduct the full $70,000 like normal for 401k contributions, moving their taxable income down to $500,000. Then they would get access to the $66,000 QBI deduction we calculated before. That is $136,000 in deductions for moving $70,000 into a 401k. At a 35% tax rate, this could result in approximately $47,600 less taxes owed that year.
There are so many other variables to consider before understanding your true tax liability. Income from a spouse could alter this, or allocations like health insurance, 401k plans, HSA accounts, etc., can impact the QBI deduction you receive. While all of these can be good to have, it is important to understand the trade-offs. Taxes should not force you to miss out on great benefits (like HSAs), but after you have a business and personal financial plan in place, there are smart moves you can make to maximize deductions like the QBI deduction.
Key Takeaways for Business Owners
The new One Big Beautiful Bill Act has the potential to dramatically change an owner’s tax situation in the coming years. While they did not change the calculation for the QBI deduction, expanding the phase-in window has given access to more business owners. Which means less money owed in taxes and more money reinvested in the way the owner feels best. Reach out to your accountant and advisor to learn how to optimize QBI and prepare yourself for all the new changes that could affect your taxes.
TC Falkner 