Deducting Your Qualified Business Income After OBBBA

Tax News You Can Use | For Professional Advisors

 

December 1, 2025

The One Big Beautiful Bill Act (OBBBA) extended indefinitely the deduction for qualified business income (QBI), a provision that was scheduled to sunset at the end of 2025. This is welcome news to individual taxpayers (and certain trusts) that operate businesses as passthrough entities, such as sole proprietorships, partnerships, LLCs, S corporations, and certain trusts and estates.¹ The concept is to tax income from businesses operated in this form at rates closer to those paid by C corporations. This is accomplished by a deduction on the owner’s individual income tax return for the combined business income, which is the lesser of 20% of (1) the QBI or (2) taxable income less net capital gains. In addition, under the same provision, a taxpayer can deduct 20% of qualified dividends from real estate investment trusts (REITs) and qualified income from publicly-traded partnerships (PTPs). Not all business income is QBI, and not all QBI is deductible, so it is important to review the definitions and applicable rules to determine whether this deduction is available, especially as the rules related to deductibility for REITs and PTPs can be more complicated than general QBI.
 

What Is A Qualified Trade Or Business?

For there to be a deduction for QBI, the taxpayer must receive income from a U.S. qualified trade or business. The definition of trade or business is the same as for other deductible business expenses, but there is a special safe harbor rule for owners of passthrough entities engaged in the rental real estate business, and the analysis can be very fact- and circumstance-specific.²  Taxpayers with rental income should consult carefully with their tax preparer. However, income from C corporations is excluded as is income from the trade or business of performing services as an employee (e.g., W-2 income).

Further, for taxpayers with income more than a threshold amount, the QBI deduction for income from specialized services trades or businesses (SSTBs) may be reduced or eliminated. For 2025, the income threshold is $197,300 for single taxpayers and $394,600 for married taxpayers filing jointly (with a partial  benefit for those with income between $197,300 and $247,300 for single taxpayers and between $394,600 and $494,600 for married taxpayers filing jointly.) For taxpayers below the threshold, a full QBI deduction is available. For those in the phaseout range, there is a formula to reduce the deduction. There is no deduction allowed if the taxpayer’s income exceeds the top of the range.

For non-SSTB QBI or SSTB QBI, taxpayers with income more than the threshold must reduce their QBI deduction by a portion of the business’s W-2 income and unadjusted basis immediately after acquisition (UBIA).
 

What Are SSTBs?

SSTBs are trades or businesses generally related to performing services: They include (and therefore deny the QBI deduction to higher income taxpayers) business in healthcare, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, investing and investment management, acting as a trader or dealer, or other business where the principal asset is the skill or reputation of the owner or the employees. This includes entities earning income from endorsements and name/image/likeness licensing, or public appearances.

Some businesses generate income from multiple endeavors, only some of which fall within the SSTB definition. If a business has gross receipts of $25 million or less, there is a de minimis exception if less than 10% of the income comes from SSTB activities. If the gross receipts are more than $25 million, the de minimis exception applies if less than 5% of the income comes from SSTB activities. The entity is not an SSTB if the de minimis exception applies, but the entity is an SSTB if the de minimis exception does not apply — there is no partial or fractional SSTB treatment.

What Is Qualified Business Income?

The 199A business income deduction is the net amount of QBI (consisting of qualified items of income, gain, deduction and loss from a qualified trade or business effectively connected to a U.S. trade or business) included in the taxable income of the taxpayer. Excluded from QBI are items such as capital gains and losses, certain dividends, and interest income, W-2 income (wages) and amounts received as reasonable compensation from an S corporation or as a guaranteed payment for services by a partner in a partnership. QBI does include the deductible tax on self-employment income, self-employed health insurance, contributions to qualified retirement plans, unreimbursed partnership expenses, and interest expenses for the purchase of the partnership interest or S corporation stock. 
 

How Is The 199A Deduction Computed?

The deduction is equal to the lesser of (1) 20% of the QBI (adjusted for SSTBs if the taxpayer’s income exceeds the threshold) plus 20% of the REIT and PTP income (including limitations) or (2) 20% of the taxpayer’s taxable income excluding net capital gains.

Example 1:

Cindy, a single taxpayer, is an accountant and operates her business as a sole proprietorship. The net income from her business for 2025 is $150,000, and her total income is $185,000. Cindy’s income from her accounting business is QBI from a SSTB.  Because her income is below the 2025 threshold for SSTB income ($197,300), Cindy is allowed the full 20%/$20,000 QBI deduction for the income from her business.

Example 2:

Mark, a married taxpayer who files jointly, is a partner in a law firm operated as a partnership. He receives profits income of $300,000 from the partnership. The total income reported on his joint return is $400,000. The income from his practice is QBI and SSTB. His QBI deduction (assuming no adjustments for wages or UBIA) is determined by multiplying  the normal QBI deduction (in this case $60,000) by a fraction based on how much income he has in excess of the threshold. The calculation is $400,000 (income) minus $394,600 (threshold) divided by the phaseout amount ($100,000). This is 5.4%, so Mark’s $60,000 QBI deduction is reduced by $3,240, resulting in a deduction of $56,760.

Example 3:

Sean operates a company organized as an S corporation that manufactures and sells computer hardware. Sean’s K-1 income from the S corporation is $500,000, and his total income on his return is $650,000. Because his income exceeds the threshold, his QBI deduction will be reduced by any W-2 and UBIA adjustments, but he will be still entitled to a QBI deduction because his business is not an SSTB.
 

In Conclusion

The good news for taxpayers is that the QBI deduction, which was set to expire at the end of 2025, has been extended indefinitely, bringing tax relief to  owners of passthrough businesses that qualify. Those operating their businesses as C corporations may wish to review whether any possible tax savings would be available if the business were a passthrough. The rules for calculating the deduction are complex, including exceptions and restrictions not discussed here, so it is important for taxpayers to consult their tax preparer before changing entity types.

 

¹ Where the qualified trade or business is owned via a partnership, LLC or S corporation, the deduction passes through to the individual owners of that entity.

² See Rev. Proc. 2019-38 for details on the safe harbor.