OBBBA Made the QBI Deduction Permanent

#What QBI is (refresher)

The Qualified Business Income deduction was created by TCJA in 2017. It lets eligible pass-through business owners (sole proprietors, partnerships, S-corp shareholders) deduct 20% of qualified business income on their personal return. For owners who fully qualify, this can lower the tax rate. It drops from as high as 37% down to about 29.6%.

In the examples below, the $200,000 is the profit left after the owner’s salary. Say your taxable income is over $201,750 single ($403,500 joint). Or say your business pays little in wages, or is a service business. In either case, the deduction is smaller.

Who qualifies:

• Pass-through entities: sole proprietorships (Schedule C), partnerships (Form 1065), S-corporations (Form 1120-S)
• NOT C-corporations (they get the 21% corporate rate instead)
• NOT W-2 wages or investment income

The complexity:

• “Specified service trade or business” (SSTB) limitations apply at higher incomes. This includes doctors, lawyers, consultants, accountants, athletes, performing artists, and financial advisors. They face a reduced or no QBI deduction above the phase-out thresholds
• Non-SSTB businesses (most other industries) face a W-2 wages + qualified property limitation above the phase-outs
• Below the thresholds, the 20% deduction applies cleanly

This complexity is why most ETS S-corp clients have always benefited a lot from QBI. But the deduction has long been the biggest source of tax-return preparation complexity too.

#What OBBBA changed

#Change 1: Permanence

This is the headline. The QBI deduction was scheduled to expire at the end of 2025. OBBBA removed the expiration date from IRC §199A(i), making the deduction permanent indefinitely.

For ETS clients running pass-through businesses, this eliminates years of planning uncertainty. The “do I S-corp-elect before QBI sunsets?” conversation is gone. The “should I switch to C-corp to lock in the 21% rate before QBI disappears?” conversation is gone.

S-corp + LLC pass-through structures now have a stable tax landscape into the foreseeable future.

#Change 2: Expanded phase-out thresholds

For 2025, OBBBA increased the income thresholds at which QBI limitations begin:

Below these thresholds, the full 20% deduction applies. No W-2 or qualified-property limits apply, and there are no SSTB exclusions. Above the threshold, the limits phase in over the next $75,000 for single filers and $150,000 for joint filers. For 2026, that means the limits are fully on at $276,750 single and $553,500 joint.

In 2026 the limits start phasing in at taxable income of $201,750 single and $403,500 joint. The wider range gives people in that range a bigger deduction than the old rule did. Say you are a doctor, lawyer, or other service-business owner with income above the threshold. In 2026, you keep more of the deduction than you would have under the old range. You do not get the full deduction until your income is back under the threshold.

#Change 3: New $400 minimum deduction

OBBBA added a new minimum QBI deduction. It applies to taxpayers with at least $1,000 in combined qualified business income. That income must come from active trades or businesses where they materially participate.

The deduction is the greater of:

• The regular QBI deduction (20% of qualified income, subject to limitations)
• $400

For a very small business with at least $1,000 of income you work in, the deduction is at least $400. That cuts your tax by about $40 to $90. Not life-changing, but it cleans up edge cases. For how this floor interacts with multiple businesses and aggregation, see our full mechanics of the new QBI minimum deduction floor.

#What this means for ETS-client planning

The OBBBA QBI changes affect ETS clients differently by segment:

1. S-corp owners with net income above ~$80K (the original break-even threshold for S-corp election). QBI was already a key part of the S-corp value proposition. Permanence removes the pressure to lock in benefits before any sunset. S-corp election decisions can now be made on longer time horizons. S-corp election mechanics are unchanged. The after-tax math just got more stable.

2. Single-member LLC owners with net income approaching the SSTB threshold: This applies to physicians, dentists, attorneys, and other SSTBs with income above the $201,750 (single) or $403,500 (MFJ) threshold. The widened 2026 phase-in range means you keep more of the deduction than under the old range. You just do not get the full deduction. Worth re-running the math.

3. Pass-through partnership members: QBI flows through K-1s. Permanence simplifies long-horizon partnership planning. The W-2 wages + qualified property limitation above the thresholds still applies for non-SSTB businesses.

4. C-corp founders considering switch to S-corp: The C-corp vs. pass-through decision was complicated by QBI uncertainty. Now that QBI is permanent, the pass-through case is stronger for businesses that don’t specifically need a C-corp. That means not VC-track, not retaining large profits inside the entity, and not pursuing QSBS.

5. Side-hustle / small-business owners with limited QBI: The new $400 minimum floor helps very small operators. Mostly cleanup at the edges.

#What didn’t change

#Common planning moves

For ETS clients in pass-through structures, three OBBBA-driven moves to revisit:

Move 1: Re-evaluate S-corp election timing. Say you’re an LLC or sole prop near the ~$80K to $100K net income threshold. Say you were waiting to S-corp-elect until QBI was sorted. The wait is over. If your profit is steady, and well above what you would pay yourself as a salary, an S-corp may save tax. You must pay yourself a fair salary, run payroll and file a separate return. We run the numbers with you first. See Form 2553.

Move 2: Re-examine SSTB phase-out positioning. Say you’re a physician, dentist, lawyer, or other SSTB owner with income near the $201,750/$403,500 threshold. Model where you actually land. Income management between W-2 and S-corp distribution can shift your result. It can affect whether you stay under the threshold and get full QBI, or land above it with partial QBI.

Move 3: Reconsider C-corp election (if you previously elected). Some businesses S-corp-converted to C-corp during the QBI uncertainty (locking in 21% corporate rate). With QBI permanent, those conversions may be worth revisiting. If you ended your S-corp status, you generally must wait 5 years to elect it again. After you switch back, built-in gains tax can apply for 5 years. Don’t reverse without modeling.

#Common questions

When does the QBI permanence take effect? Tax years beginning after December 31, 2025. For most filers, that’s the 2026 tax year onward. The QBI deduction was set to end after 2025. OBBBA removed that end date, so it now applies to 2026 and later years too.

Does QBI apply to rental real estate? Sometimes. Real estate activity must rise to the level of a “trade or business” under Section 162 to generate QBI. The IRS provides a safe harbor (Rev. Proc. 2019-38) for rental real estate enterprises that meet specific operational requirements. Those requirements are 250 hours of rental services per year, separate books per enterprise, and contemporaneous records. Pure passive triple-net lease rentals typically don’t qualify.

Can I claim QBI if I’m a W-2 employee? No. Pure W-2 wages aren’t qualified business income. Say you have a side business in addition to your W-2, like 1099 consulting or a side LLC. Then the side-business income is QBI-eligible.

What about REIT dividends and PTP income? Both get a 20% deduction. They are figured apart from your business income, and the wage limit does not apply to them (Section 199A(b)(1)(B)).

Does the SSTB limitation still apply above the threshold? Yes. OBBBA didn’t change the SSTB rules. It widened the range over which they phase in. Specified service businesses still face a reduced QBI deduction above the threshold. That group includes medical, legal, accounting, consulting, financial services, performing arts, and athletics. The phase-out completes at $75K (single) or $150K (MFJ) above the threshold starting in 2026.

Can I aggregate businesses for QBI purposes? Yes, under Regs. §1.199A-4 aggregation rules. You can group businesses if you own 50% or more of each. They must use the same tax year, and none can be a service business. They also need to meet at least two of three tests. Those are same kind of work, shared resources, or depending on each other. Useful for owner-operators with multiple LLCs or for managing the W-2 wages + qualified property limitations.

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Say you run a pass-through business. Say you have not re-modeled QBI in light of OBBBA’s permanence and expanded thresholds. The Discovery call is the right next step. We map QBI into your overall tax-planning picture as part of every Tax Analysis engagement.