In recent years, the tax landscape for businesses has undergone significant changes. One notable provision is the Qualified Business Income (QBI) deduction, first enacted under the Tax Cuts and Jobs Act (TCJA) of 2017. This deduction provides a valuable tax break for eligible business owners and was originally set to expire in 2025. However, the One Big Beautiful Bill Act (OBBB), passed in 2025, has expanded and extended the deduction. This is making it more accessible to more business owners for the years ahead. The QBI deduction aims to stimulate economic growth by offering tax relief to small business owners and entrepreneurs. This article explores how the deduction works, who qualifies, and what’s changed under the One Big Beautiful Bill.
Understanding the Qualified Business Income Deduction
The Qualified Business Income deduction allows eligible business owners to deduct up to 20% of their qualified business income from their taxable income. This deduction is available to individuals that own pass-through entities. These include sole proprietorships, partnerships, S corporations, and limited liability companies (LLCs).
Qualified Business Income is generally defined as the net amount of income, gains, deductions, and losses from any qualified trade or business. It excludes certain investment-related income such as capital gains, dividends, and interest income. The deduction is designed to provide tax relief to small business owners. It also encourage investment in businesses that drive economic growth.
Eligibility Criteria
The QBI deduction can lead to major tax savings, but not all business owners will qualify. Your eligibility depends on several key factors, many of which have been updated under the One Big Beautiful Bill Act (OBBB).
Business Structure
The QBI deduction is generally available to businesses organized as sole proprietorships, partnerships, S corporations, and LLCs. C corporations are not eligible.
Qualified Income
QBI generally refers to the net income from a qualified trade or business. Income that does not qualify still includes capital gains and losses, dividends, interest income, certain annuities, foreign income, and compensation paid to owners in the form of wages or guaranteed payments.
Expanded Taxable Income Limits (Post-OBBB)
Under the One Big Beautiful Bill Act, the taxable income thresholds for full QBI deduction eligibility were significantly raised beginning in tax year 2025:
- Single filers can claim the full 20% QBI deduction if their total taxable income is under $210,000
- Married filers filing jointly can claim the full deduction if income is under $420,000
Above these thresholds, the deduction phases out over a $100,000 range. This means:
- For single filers, the deduction phases out between $210,000 and $310,000
- For joint filers, it phases out between $420,000 and $520,000
These changes effectively make the QBI deduction more accessible to middle- and upper-middle-income business owners.
Qualified Trade or Business
If your income is over the limit, the type of work you do also matters. The IRS still limits the deduction for certain fields, like law, health, accounting, consulting, and financial services. These are called Specified Service Trades or Businesses (SSTBs). The good news is that the new law gives more room for partial deductions than before, even if you’re in one of these fields.
Wage and Property Limitations
If you earn more than the phaseout range, your deduction will also depend on how much you pay employees and how much property your business owns. This mostly applies to high earners or large operations. Most small business owners under the new income limits won’t need to worry about this.
How to Claim the Qualified Business Income Deduction
Claiming the Qualified Business Income (QBI) deduction can be done by completing Form 8995, Qualified Business Income Deduction Simplified Computation. If your tax situation is a bit more complicated, you’ll need to use Form 8995-A, Qualified Business Income Deduction. This may include someone who wants to claim the QBI deduction but has income above the threshold.
Benefits of the QBI Deduction
The QBI deduction, especially after the One Big Beautiful Bill Act, offers several important benefits:
- Tax Savings: The primary benefit is the reduction of taxable income by up to 20%, leading to significant tax savings.
- Encourages Investment: The deduction encourages investment in businesses by providing a tax incentive for entrepreneurs and investors to actively participate in qualifying trades or businesses.
- Support for Small Businesses: Small businesses stand to gain the most from the QBI deduction. It helps them retain more income for growth and expansion.
- Flexibility in Business Structure: The QBI deduction provides business owners with flexibility in choosing their business structure.
Tax Help for Business Owners
The Qualified Business Income deduction remains one of the most valuable tools for small business tax planning. With the One Big Beautiful Bill Act extending and expanding this provision, business owners should take full advantage. Understanding the rules, especially the income thresholds, limitations, and changes under OBBB, is key to maximizing your benefit. If you’re unsure how these changes apply to you, consult a qualified tax professional for personalized guidance. Optima Tax Relief is the nation’s leading tax resolution firm with over $3 billion in resolved tax liabilities.
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