Permanent QBI deduction provides some tax planning certainty

Executive summary: Permanent QBI deduction provides some certainty

Partnerships, S corporations and sole proprietors gained some long-term tax planning certainty from the One Big Beautiful Bill Act, which made permanent the 20% qualified business income deduction under section 199A. With the deduction no longer set to expire, long-term tax planning models and entity structure reviews should be revised accordingly.

The One Big Beautiful Bill Act (OBBBA) solidified a significant benefit for pass-through entities by making permanent the section 199A qualified business income deduction. This provides long-term tax planning certainty for partnerships, S corporations, and sole proprietors, many of which had been bracing for the deduction’s scheduled expiration at the end of 2025.

While substantive changes to the legislation (aside from permanence) are modest in scope, they are meaningful for certain taxpayers.

What are the changes?

The OBBBA enacts several technical changes to section 199A:

Permanence of the 20% QBI deduction

The deduction, which allows eligible taxpayers to deduct up to 20% of their qualified business income, is now permanent for noncorporate taxpayers.

Expanded phase-in thresholds

The deduction includes certain limitations, such as those related to specified service trades or businesses (SSTBs), W-2 wages, and qualified property. These limitations are phased in over a window once a taxpayer’s income exceeds a certain threshold.  This window has been expanded:

• From $50,000 over the income threshold to $75,000 over the income threshold for single filers
• From $100,000 over the income threshold to $150,000 over the income threshold for joint filers

This may provide some expanded eligibility for business owners who are around the top end of the limitation phase-in window.

Minimum deduction introduced

A new floor provides for a minimum deduction of $400 for taxpayers with qualified active business income.

What do the changes mean for businesses?

For many pass-through business owners, the permanence of the QBI deduction removes a looming source of tax uncertainty.

Others may see a benefit from the OBBBA provision, including:

• Owners near the phase-in thresholds: The expanded income window allows more taxpayers to qualify for a portion of the deduction.
• SSTB owners: While SSTBs remain subject to limitations, the broader phase-in window may soften the impact for those near the upper income limits.
• Taxpayers with modest QBI: The $400 minimum deduction ensures a minimum benefit even if other factors might reduce the deduction.

However, the core limitations remain unchanged. Taxpayers with income above the phase-in window may still see their deduction reduced or eliminated if their business meets any of the following three criteria:

• Pays insufficient W-2 wages,
• Lacks sufficient qualified property
• Is classified as an SSTB

What should businesses do now?

• Reassess eligibility: Business owners should revisit their QBI calculations under the new phase-in thresholds to determine if they now qualify for a larger deduction.
• Review entity structure: While the deduction is now permanent, its limitations still make entity structure and compensation planning critical.
• Update tax projections: With the deduction no longer set to expire, long-term tax planning models should be revised accordingly.

What should businesses consider over the long term?

• Strategic compensation planning: Ensuring sufficient W-2 wages can help preserve the deduction for high-income owners.
• Asset investment: Maintaining or increasing qualified property may help mitigate deduction limitations.
• SSTB classification: Businesses operating in gray areas should evaluate whether restructuring or reclassification could improve eligibility.