The 20% QBI Deduction: A Must-Know Tax Break for Pass-Through Business Owners (Before It’s Gone!)

Introduction

For self-employed business owners—whether you’re running an S-corporation, partnership, or sole proprietorship—the Qualified Business Income (QBI) deduction under §199A of the Tax Cuts and Jobs Act is a game-changer. By permitting you to deduct 20% of your qualified business income on your personal tax return, this break can lower your effective tax rate on that income from 37% down to roughly 29.6%. But this powerful deduction carries important qualifications, phase-outs, and an expiration date: December 31, 2025. Add to that the recent One Big Beautiful Bill Act (OBBBA), and the clock is ticking. Read on to learn who qualifies, how income limitations apply, how the OBBBA affects §199A, and what action steps you need to take now.

What Is the QBI Deduction?

The QBI deduction (sometimes called the §199A deduction) allows eligible owners of pass-through entities—including S-corps, partnerships, and sole proprietorships—to deduct up to 20% of their “qualified business income” (QBI) when calculating their taxable income on Form 1040. This isn’t an above-the-line deduction; rather, it reduces your taxable income directly, delivering substantial tax savings.

Note: Income earned by C-corporations is not eligible for §199A.

Qualified vs. Non-Qualified Income

• Included (QBI): Net income from your trade or business (excluding capital gains, dividends, and certain service-provider income).
• Excluded: Reasonable compensation paid to S-corp shareholders, investment income, and income from excluded “specified service trades or businesses” (SSTBs) once phase-out thresholds are exceeded.

Income Thresholds & Phase-Out Rules

High-earning owners—especially those in specified service fields like law, accounting, consulting, and health—face income-based limitations. Even if your business is non-service (e.g., manufacturing, retail), you’ll need to satisfy wage or capital tests above certain thresholds.

1. Filing Status Phase-In Range Phase-Out Point Married Filing Jointly $383,900 – $483,900 (2024) $483,900 Single/Head of Household $191,950 – $241,950 (2024) $241,950 Married Filing Separately $191,950 – $241,950 (2024) $241,950 Specified Service Trades or Businesses (SSTBs):

• Full 20% deduction only if your taxable income is below the lower threshold.
• Above that, your deduction phases out completely by the upper threshold.

1. Non-Service Businesses:

• If your taxable income exceeds the upper threshold, your QBI deduction is limited to the greater of:
• 50% of your W-2 wages paid, or
• 25% of W-2 wages paid plus 2.5% of your qualified depreciable property basis.

The One Big Beautiful Bill Act (OBBBA) & §199A

On July 3, 2025, Congress enacted the One Big Beautiful Bill Act (OBBBA), which made sweeping changes across tax policy—but did not extend the §199A deduction beyond its scheduled sunset on December 31, 2025. Key impacts include:

1. No Extension of QBI Deduction: The OBBBA left §199A’s expiration intact. High-earners must fully leverage the deduction by tax year 2025 or lose it forever.
2. Increased Audit Scrutiny: With the OBBBA reprioritizing IRS resources, QBI claims—especially wage-and-capital calculations and SSTB classifications—are likely to face heightened examination.
3. Retroactivity Concerns: Although repeal isn’t retroactive, future legislation could target deductions claimed in 2025. Documenting your eligibility now is critical.

Why Act Now? “Use It or Lose It”

With only two tax years remaining to claim the full 20% QBI deduction—and no guarantee of an extension—proactive planning is essential:

• Accelerate or Defer Income: Shift revenue recognition into 2024–2025 where possible to maximize QBI eligibility.
• Optimize Entity Structure:
• Consider converting SSTB activities into non-SSTB models or adding non-service business lines.
• If you operate as an S-corp, strategically adjust your salary vs. profit distributions to meet wage tests.
• Invest in Capital Assets: For non-service businesses over the threshold, adding depreciable property can boost the “capital‐investment” half of the wage-and-capital test.
• Document Thoroughly: Maintain clear records of wages paid, asset basis, and business classifications to support your deduction under increased audit pressure.

Smooth Tax Planning Strategies

1. Year-End Projections: Run detailed projections of taxable income, QBI, W-2 wages, and depreciable asset basis for 2024 and 2025.
2. Entity Reevaluation: Work with your CPA or tax attorney to determine if an S-corp election or other pass-through structure change could yield additional QBI benefits.
3. Operational Adjustments: If you’re nearing the SSTB phase-out, explore whether ancillary non-service activities (e.g., product sales) could qualify for QBI.
4. Stay Informed: Monitor IRS guidance on §199A regulations, especially related to the wage-and-capital calculations.

SEO Best Practices & Target Keywords

• Primary Keywords: QBI deduction, qualified business income, §199A, pass-through business tax break, Tax Cuts and Jobs Act, One Big Beautiful Bill Act.
• Secondary Keywords: pass-through entity tax planning, SSTB phase-out, wage-and-capital limit, sunset of QBI deduction, tax planning for S-corps.
• Meta Description (suggested):

“Learn how to maximize the 20% QBI deduction under §199A for pass-through business owners—understand income thresholds, phase-outs, and the impact of the One Big Beautiful Bill Act before this tax break expires in 2025.”

Key Takeaways

• 20% Tax Cut: The §199A QBI deduction can lower your top rate from 37% to about 29.6% on qualifying income.
• Qualification Rules: Applies only to pass-through entities; C-corporation income is excluded.
• Phase-Out Thresholds: SSTBs lose eligibility between $383,900 and $483,900 (MFJ) in 2024; non-service businesses face wage-and-capital limits above those levels.
• Sunset Date: §199A expires December 31, 2025—Congress has not extended it under the OBBBA.
• Action Steps: Accelerate or defer income, optimize entity structure, invest in qualified property, and document meticulously.

Next Steps: Don’t let this powerful deduction slip away. Consult your tax advisor today to tailor a year-end strategy that fully exploits the QBI deduction before it’s gone.