The Qualified Business Income (QBI) Deduction has been a game-changer for business owners, passive investors, and certain estates and trusts since its enactment effective for tax years beginning after December 31, 2017. Originally set to expire in tax years beginning after December 31, 2025, the QBI Deduction has now been made permanent through The One Big Beautiful Bill Act (OBBBA). This update in law is potentially favorable to these taxpayers.
If you’re a business owner, a passive investor in businesses through partnerships or S Corporations, an executor of an estate, or a trustee of a non-grantor trust, understanding the eligibility of the QBI Deduction and its complex rules is crucial.
This comprehensive guide breaks down everything you need to know about the QBI Deduction and how recent legislative changes impact your income tax liability.
What Is the QBI Deduction?
The QBI Deduction allows individuals and certain estates or trusts to take a 20% deduction on Qualified Business Income. This effectively reduces the maximum federal income tax rate from 37% to 29.6% on Qualifying Business Income.
Congress lowered the corporate income tax rate from 34% to 21% with the Tax Cuts and Jobs Act. The QBI Deduction was introduced to help pass-through entities like partnerships, S corporations, and sole proprietorships compete more fairly with C corporations.
Updates from The OBBBA
Before the OBBBA, signed into law on July 4, 2025, the QBI Deduction was scheduled to expire for tax years beginning after December 31, 2025. Business owners and their advisors faced uncertainty about long-term tax planning, making it challenging to make strategic decisions about entity structure, compensation strategies, and investment planning.
The permanence of this deduction through the OBBBA removes this uncertainty and provides several key enhancements:
Enhanced Phase-In Thresholds
The OBBBA significantly expanded the income ranges where taxpayers can receive partial QBI deductions:
- Previous ranges: $50,000 for single filers, $100,000 for joint filers above base thresholds
- New ranges: $75,000 for single filers, $150,000 for joint filers above base thresholds
- Inflation adjustments: These ranges will be indexed for inflation beginning in 2026
New Minimum Deduction Guarantee
Starting in 2025, taxpayers with at least $1,000 in Qualified Business Income from active trades or businesses (where they materially participate) are guaranteed a minimum deduction of $400, even if other limitations would otherwise have reduced or eliminated their deduction. Both the $1,000 threshold and $400 minimum deduction are indexed for inflation beginning in 2027.
Benefits for Key Stakeholders
Business Owners
Business Owners can now make long-term strategic decisions about your business structure without worrying about losing this valuable deduction. This stability allows for better planning, including business expansion decisions, and compensation structuring. The enhanced phase-in thresholds allows for business owners with minority ownership interests to benefit.
Passive Investors
Passive investors with Qualified Business Income can rely on this deduction for managing their Federal quarterly estimated tax payments . The permanent status provides clarity on their out of pocket tax burden, as they will continue to benefit from the QBI Deduction. Passive Investors should reassess their investment strategy and ability to benefit from aggregation, which can further lower their potential federal income tax exposure.
Executors and Trustees
The permanent nature of the QBI Deduction allows for more confident long-term tax planning strategies. Executors and Trustees can make better decisions on distributions to beneficiaries in accordance with the terms and provisions of the trust. Beneficiaries that are distributed Taxable Income may be eligible to claim the QBI Deduction and potentially further benefit from aggregation.
Income Eligible for the QBI Deduction
The QBI Deduction applies to income from a
Qualifying Trade or Business (QTB)
conducted in the United States or Puerto Rico. This includes:
- Business Income that is not a Specified Service Trade or Business (SSTB), derived from:
- Partnerships, or LLCs taxed as partnerships; and/or
- S Corporations, or LLCs taxed as S Corporations; and/or
- Sole proprietorships, or Single-Member LLCs treated as sole proprietorships
- Qualified REIT Dividends
- Income from Publicly Traded Partnerships
However, there are significant limitations to consider. The QBI Deduction is subject to the 20% Taxable Income limitation. It is limited to 20% of a Taxpayer’s Taxable Income, calculated as Adjusted Gross Income minus the Standard or Itemized Deduction. This is further reduced by Net Capital Gains, including Qualified Dividends. Net Capital Gains cannot be below zero.
Maximizing Your QBI Deduction
Wage and Basis Limitations
For taxpayers with income from QTBs above the income thresholds, the QBI Deduction is limited by the greater of:
- 50% of W-2 wages paid by the QTB, or
- 25% of W-2 wages plus 2.5% of the Unadjusted Basis Immediately After Acquisition Qualified Property (UBIA)
Taxpayers with ownership interests in QTBs that have minimal payroll or don’t own depreciable property are often limited to the QBI Deduction when the Taxpayers’ taxable income is above the income thresholds. QTBs with fully depreciated assets can also limit the Taxpayers’ ability to claim the QBI Deduction. A review of income from QTB(s) with W-2 Wages and UBIA will allow the business owners and its partners or shareholders to maximize their QBI Deduction.
Aggregation Strategies
One powerful strategy for maximizing the QBI Deduction involves aggregating multiple trades or businesses. Business owners, passive investors, and certain estates or trusts can benefit from aggregation if they own multiple QTBs that meet specific criteria explained below. All QTBs must:
- Have the same tax year
- Have common ownership of at least 50%
- Share similar or interdependent business activities
- Have centralized management functions
This strategy can be particularly effective when one QTB has excess W-2 Wages or UBIA that can offset limitations from a second QTB. This strategy requires careful planning and analysis, as the aggregation election is irrevocable. In addition, the Taxpayers will be required to obtain additional data not disclosed on their K-1s. The additional data needed to determine aggregation decisions include the QTBs:
- Overall ownership structure
- Centralized management functions
The New Minimum QBI Deduction
With the new $400 minimum deduction, taxpayers should ensure they structure their businesses to qualify as “active” participants. This means material participation in the Trade or Business, which can provide guaranteed benefits even in lower-income years.
Planning Strategies
With the QBI Deduction now made permanent, several long-term strategies have become more attractive:
Entity Structure Optimization
Business owners can now more confidently evaluate whether their current entity structure maximizes the QBI deduction. Some may benefit from converting from C Corporations to Partnerships, S Corporations, or Sole Proprietorships. The enhanced phase-in thresholds could make pass-through structures more attractive for a broader range of income levels.
Compensation Planning
For S Corporation owners, the balance between reasonable compensation (W-2 Wages) and shareholder distributions becomes even more critical. An increased salary can increase the Taxpayer’s QBI Deduction if otherwise limited by W-2 Wages or UBIA.
Retirement and Succession Planning
The permanent nature of the QBI Deduction makes it easier to project long-term tax benefits in retirement and succession planning scenarios. The permanence of it allows business owners to structure business sales or transitions with greater confidence. Knowing that the deduction will remain available helps with business valuations, projecting post-sale income tax liabilities, and designing estate planning strategies that best manage future income tax exposure by maximizing the QBI Deduction.
State Tax Considerations
While the OBBBA makes the QBI Deduction permanent, it’s important to note that many states decouple from it. Some states:
- Don’t allow the QBI deduction at all
- Have different income thresholds
- May modify the calculation
What This Means for Different Taxpayers
Business Owners
Business owners are provided with potential tax benefits on equipment purchases, hiring decisions, and expansion plans with confidence that it will remain available to offset the tax impact of increased income. Small business owners benefit significantly from both the permanent status and the minimum QBI Deduction. The $400 minimum deduction ensures some benefit even in challenging or beginning years of building their business.
Passive Investors
Real estate professionals and investors often benefit from the QBI Deduction. Permanent status of this deduction makes real estate investment strategies more predictable and potentially more attractive compared to other investment options.
Executors and Trustees
Executors and Trustees should review the relevant legal documents to better understand the provisions regarding distribution requirements to beneficiaries. They should also evaluate which taxpayer (Estate, Trust, Beneficiary) will most benefit. Lastly, a review of estate planning strategies should be revisited and reassessed given the permanence.
Working with Your Tax Professional
The complexity of the QBI deduction rules, combined with their permanent status and enhancements, makes professional guidance more valuable than ever. Your tax professional can help you:
- Determine if your activities qualify as trades or businesses
- Evaluate whether your business falls under SSTB limitations
- Optimize your entity structure for the maximum QBI Deduction under the new rules
- Calculate and maximize the W-2 or UBIA limitations
- Develop aggregation strategies where appropriate
- Plan for the minimum deduction guarantee
- Navigate state-specific QBI rules
Key Considerations Moving Forward
While the permanent status of the QBI Deduction provides certainty, several factors require ongoing attention:
Annual Income Fluctuations
Your QBI deduction can vary significantly based on annual income changes, but the minimum provides a floor. Strategic timing of income and deductions becomes crucial for optimization.
Business Activity Changes
Modifications to your business activities could affect SSTB status or qualification for the deduction entirely.
Entity Structure Reviews
Periodic reviews of your entity structure remain important, especially as your business grows or your personal tax situation changes. The enhanced phase-in ranges may make different structures more attractive.
Inflation Adjustments
Stay aware of annual inflation adjustments to thresholds and the minimum deduction amount, which begin in 2026 and 2027, respectively.
Next Steps
The permanent status and enhancements of the QBI deduction through the OBBBA represent a significant opportunity for long-term tax planning. Whether you’re a business owner looking to optimize your operations through compensation or capital planning, Taxpayer evaluating aggregation, or working with a financial advisor to develop tax strategies, now is the time to evaluate how the QBI Deduction fits into your overall financial plans.
The complexity of QBI calculations and the numerous planning opportunities—including the new minimum deduction and expanded phase-in ranges—make professional guidance essential. Our tax experts at Wiss have extensive experience helping clients maximize their QBI deduction through various strategies and analyses and navigate the new provisions under the OBBBA.
Ready to optimize your QBI strategy? Contact our team at Wiss today to schedule a consultation and ensure you’re positioning yourself for maximum tax efficiency under the new permanent rules. Our professionals can help you evaluate your current situation, identify new opportunities from the OBBBA enhancements, and develop a comprehensive tax strategy that leverages the permanent QBI Deduction to its fullest potential.
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