The QBI Deduction is Now Permanent

The 20% deduction for Qualified Business Income, temporarily introduced as part of the Tax Cuts and Jobs Act of 2017 (TCJA), is now made permanent under the recently passed One Big Beautiful Bill (OBBB).

The TCJA cut the C corporation tax rate to a flat 21%, and the QBI deduction provided tax relief for certain other entities not organized as C corporations.

Background on Qualified Business Income

Many businesses are organized as so called “pass-through” businesses for tax purposes. The income from the business is passed through to the owners, who then pay the tax.

These entities include:

• Business entities such as partnerships, limited liability companies classified as partnerships, or S corporations for tax purposes.
• Sole proprietorships, farms, and certain businesses generating income from a real property business.

The QBI deduction, when fully applicable, can reduce the top federal marginal rate for active owners from 37% to 29.6%.

Here are the various effective tax rates under current law (assuming highest marginal tax rates and all after-tax earnings are distributed out of a C corporation).

Entity Choice Federal Tax Rates

How to Gain the QBI Deduction

Not all business income is eligible for the QBI deduction. Income from service-based businesses, like law firms, CPA firms, physician practices, consulting firms, financial services firms, and others, is not eligible for the QBI deduction.

Income from real estate activities, like rental income, can qualify for the QBI deduction, although entities producing rental income with a minimal amount of business activity may not be eligible for the QBI deduction. REIT dividends and income from publicly traded partnerships can also qualify.

To achieve the full deduction, businesses must either pay a certain amount of wages or have a certain amount of cost basis in property. Generally, the QBI deduction is limited to 50% of the associated wage expenses, or 25% of the associated wage expenses and 2.5% of the businesses’ unadjusted basis in qualified property.

Taxpayers with taxable income under certain income ranges can claim the QBI deduction regardless of whether the income comes from a service-based business or whether there are adequate wage expenses or basis in property.

For the 2024 tax year, married taxpayers with taxable income under $383,900 can fully claim the QBI deduction under these provisions, with a phase out range extending to $483,900 of taxable income.

Changes to QBI Under New Tax Legislation

Originally set to expire at the end of the 2025 tax year, the OBBB makes the QBI deduction permanent at 20%. A previous House version proposed a 23% QBI deduction, but this was scaled back under the final law (although there are new proposals to expand the deduction to 23%).

Additionally, the OBBB enhances the QBI deduction for taxpayers subject to the phase-out limitations, resulting in a higher QBI deduction for the same income than under the previous law.

Next Steps for QBI with New Tax Legislation

Permanency of the QBI deduction ensures current owners of pass-through businesses will not have a higher tax burden after the 2025 tax year. Maximizing the QBI deduction and comparing the various choice of entity options can be complex. We can help you consider all of the various options and ensure your business makes full use of this QBI deduction.