QBI Deduction: How the OBBBA Improves the Rules

Many owners of pass-through businesses and self-employed individuals have taken advantage of the Section 199A qualified business income (QBI) deduction. Created by the Tax Cuts and Jobs Act (TCJA), this break was scheduled to expire after 2025, making its future uncertain and hampering tax planning.

The tax and spending legislation known as the One Big Beautiful Bill Act (OBBBA) has ended that uncertainty by making the QBI deduction permanent. It also widens the phase-in ranges on the deduction's limits. As a result, more business owners may be able to claim at least a partial deduction.

How the QBI Deduction Works

Under current law, self-employed individuals, sole proprietors and owners of the following pass-through entities may be eligible to deduct as much as 20% of their QBI:

Partnerships,
Limited liability companies (typically), and
S corporations.

QBI is defined as the net amount of income, gains, deductions and losses, excluding reasonable compensation, certain investment items and payments to partners for services rendered. You can claim the deduction regardless of whether you itemize deductions, and it's also deductible for alternative minimum tax purposes.

The deduction can't exceed 20% of the taxpayer's taxable income. The amount of the allowable QBI deduction is subject to additional limitations at higher taxable income levels. These income limits are indexed annually for inflation.

Wage and Investment Limits

If your taxable income exceeds the applicable threshold amount, a wage and investment limit kicks in. For 2025, the taxable income phase-in ranges for the limit are:

$394,600 to $494,600 for married couples filing jointly, and
$197,300 to $247,300 for all other taxpayers.

Starting in 2026, the OBBBA increases the phase-in ranges for the wage and investment limit from $100,000 to $150,000 for married couples filing jointly and from $50,000 to $75,000 for all other taxpayers. So, for 2026, without factoring in annual inflation adjustments (which are typically released in late October or early November), the taxable income phase-in ranges would be:

$394,600 to $544,600 for joint filers, and
$197,300 to $272,300 for all other taxpayers.

If your income exceeds the top of the applicable range, your QBI deduction is limited to the greater of:

Your share of 50% of W-2 wages paid to employees during the tax year and properly allocable to QBI, or
The sum of your share of 25% of such W-2 wages, plus your share of 2.5% of the unadjusted basis immediately upon acquisition (UBIA) of qualified property.

Qualified property means depreciable tangible property (including real estate) that a qualified business owns and uses to produce QBI. The UBIA of qualified property generally equals its original cost when it was first put to use in your business.

If your taxable income falls within the applicable range, the wage and investment limits partially apply. Your tax advisor can explain the impact in your specific situation.

SSTB Limit

Another limit on the QBI deduction applies to so-called specified service trades or businesses (SSTBs). The tax law definition of SSTBs specifically includes businesses that perform services in the following fields:

Health,
Law,
Accounting,
Actuarial science,
Performing arts,
Consulting,
Athletics,
Financial services,
Investing and investment management,
Trading, and
Dealing in securities, partnership interests or commodities.

A trade or business where the principal asset is the reputation or skill of an employee or owner is also considered an SSTB. However, architecture and engineering firms are specifically excluded.

The same phase-in ranges apply to the deduction for SSTBs. In contrast to the wage and investment limit, though, once taxable income exceeds the upper limit of the phase-in range, no QBI deduction is allowed for an SSTB. But the SSTB limit phase-in ranges will also be expanded in 2026.

Likely Impact

The broadened phase-in ranges should reduce the effects of the wage and investment limit and the SSTB limit. Business owners subject to the wage and investment limit may qualify for larger deductions than they were previously allowed, and SSTB owners whose taxable income previously disqualified them may now be able to claim a deduction.

The OBBBA imposes a limit on itemized deductions for high-income taxpayers beginning in 2026. However, it expressly states that taxable income for purposes of the QBI deduction is determined without regard to that limit.

A New Minimum QBI Deduction

Additionally, the OBBBA establishes an inflation-adjusted minimum QBI deduction of $400 for taxpayers with at least $1,000 of QBI from one or more active businesses in which they materially participate. "Material participation" generally requires regular, continuous and substantial involvement by the taxpayer in business operations.

The minimum deduction will become available beginning in 2026. Both the deduction amount and the QBI threshold will be adjusted annually for inflation going forward.

There's So Much More

The OBBBA is packed with dozens of tax provisions affecting both businesses and individuals. Contact your tax advisor to leverage the changes to minimize your tax liability while staying compliant with tax law.