Here’s what HIVE AI had to say about “Has the Qualified Business Income (QBI) deduction under Section 199A changed, and who is eligible under the One Big Beautiful Bill?”:
Changes to the Qualified Business Income (QBI) Deduction Under the One Big Beautiful Bill
The Qualified Business Income (QBI) deduction under Section 199A has undergone significant modifications through the One Big Beautiful Bill Act (OBBBA), which was signed into law on July 4, 2025. These changes represent both continuity and enhancement of the existing deduction framework while making it a permanent feature of the tax code.
Permanence of the Section 199A Deduction
The OBBBA extends and makes permanent the Section 199A pass-through deduction, which allows pass-through business owners to deduct 20 percent of qualified business income when calculating taxable income. Tax Foundation This permanence provides crucial stability for business owners who previously faced uncertainty about the deduction’s continuation beyond 2025. The OBBBA makes the Qualified Business Income (QBI) deduction, also known as Section 199A, a permanent feature of the tax code. This deduction allows non-corporate taxpayers, including owners of pass-through entities (such as S corporations, partnerships, and sole proprietorships), to deduct up to 20% of their qualified business income.
The fundamental structure of the deduction remains unchanged from its original implementation. In the case of a taxpayer other than a corporation, there shall be allowed as a deduction for any taxable year an amount equal to the lesser of— (1) the combined qualified business income amount of the taxpayer, or (2) an amount equal to 20 percent of the excess (if any) of— (A) the taxable income of the taxpayer for the taxable year, over (B) the net capital gain (as defined in section 1(h)) of the taxpayer for such taxable year. IRC § 199A(a)
Enhanced Phase-In Thresholds for Income Limitations
One of the most significant changes involves the expansion of phase-in ranges for specified service trades or businesses (SSTBs) and other entities subject to wage and investment limitations. Subparagraph (B) of section 199A(b)(3) is amended by striking ” $50,000 ($100,000 in the case of a joint return) ” each place it appears and inserting ” $75,000 ($150,000 in the case of a joint return) “. Paragraph (3) of section 199A(d) is amended by striking ” $50,000 ($100,000 in the case of a joint return) ” each place it appears and inserting ” $75,000 ($150,000 in the case of a joint return) “. One Big Beautiful Bill Act: Sec. 70105. Extension and enhancement of deduction for qualified business income
This modification increases the phase-in threshold from $50,000 to $75,000 for individual filers and from $100,000 to $150,000 for joint filers. The Act also expands the deduction limit phase-in ranges for specified service trades or businesses and other entities subject to wage and investment limitations. For individual filers, the phase-in threshold increases from $50,000 to $75,000, and for joint filers, it increases from $100,000 to $150,000. The practical effect is that more business owners, particularly those with incomes just above the previous thresholds, will be able to claim a larger portion of the deduction before facing limitations.
Introduction of Minimum Deduction for Active Business Income
A notable innovation in the OBBBA is the establishment of a minimum deduction for taxpayers with active qualified business income. In the case of an applicable taxpayer for any taxable year, the deduction allowed under subsection (a) for the taxable year shall be equal to the greater of— “(A) the amount of such deduction determined without regard to this subsection, or “(B) $400. The term ‘ applicable taxpayer ‘ means, with respect to any taxable year, a taxpayer whose aggregate qualified business income with respect to all active qualified trades or businesses of the taxpayer for such taxable year is at least $1,000. One Big Beautiful Bill Act: Sec. 70105. Extension and enhancement of deduction for qualified business income
This provision ensures that taxpayers with at least $1,000 of active qualified business income receive a minimum deduction of $400, regardless of the standard 20% calculation. Furthermore, starting in 2025, an inflation-adjusted minimum QBI deduction of $400 is introduced for taxpayers with at least $1,000 of QBI from active businesses in which they materially participate. The definition of “active qualified trade or business” requires material participation within the meaning of section 469(h), ensuring that only genuinely active business owners benefit from this provision.
Inflation Adjustments and Future Indexing
The new minimum deduction amounts will be subject to inflation adjustments beginning in 2027. In the case of any taxable year beginning after 2026, the $400 amount in paragraph (1)(B) and the $1,000 amount in paragraph (2)(A) shall each be increased by an amount equal to — “(A) such dollar amount, multiplied by “(B) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting ‘ calendar year 2025 ‘ for ‘ calendar year 2016 ‘ in subparagraph (A)(ii) thereof. One Big Beautiful Bill Act: Sec. 70105. Extension and enhancement of deduction for qualified business income
Eligibility Requirements and Qualifying Entities
The eligibility requirements for the QBI deduction remain fundamentally unchanged under the OBBBA. The Tax Cuts and Jobs Act (TCJA) enacted on December 22, 2017, added IRC 199A, Qualified Business Income Deduction (QBID), allowing individuals and some trusts and estates (but not corporations) a deduction of up to: * 20 percent of qualified business income (QBI) from qualified trades or businesses, * 20 percent of real estate investment trust (REIT) dividends, and * 20 percent qualified publicly traded partnership (PTP) income. QBI includes net income or loss from domestic trades or businesses that is included or allowed in determining taxable income. This includes business income and loss from partnerships (other than PTPs), S corporations, sole proprietorships, and trusts and estates. IRS IRM 21.7.4 Income Taxes/Information Returns IRS IRM 21.7.4 Income Taxes/Information Returns
The deduction continues to apply at the individual level for pass-through entities. In the case of a partnership or S corporation, section 199A is applied at the partner or shareholder level. The rules of subchapter K and subchapter S of the Code apply in their entirety for purposes of determining each partner’s or shareholder’s share of QBI, W-2 wages, UBIA of qualified property, qualified REIT dividends, and qualified PTP income or loss. Treasury Regulation 1.199A-1
Specified Service Trade or Business Limitations
The SSTB limitations remain in effect but with expanded phase-in ranges. The final version of OBBBA keeps the general structure of these phaseout rules, as well as the applicable thresholds of taxable income above which the deduction begins to phase out. However, the new law increases the phaseout range from $50,000 (single) and $100,000 (joint) to $75,000 and $150,000, respectively, beginning in 2026. As a result, the deduction will be completely phased down – either to $0 for SSTB owners or to the WDP limit for non-SSTB owners – at $272,300 of taxable income for single filers and $544,600 for joint filers.
Impact on Tax Planning and Business Operations
The permanence and enhancements of the QBI deduction provide significant benefits for business planning and operations. The permanence of the QBI deduction provides a sustained incentive for pass-through businesses. This stability fosters long-term investment, growth, and operational planning for business owners, as they can rely on this significant tax break without fear of its expiration. The expanded phase-in ranges mean that more business owners, particularly those with incomes just above previous thresholds, will be able to claim a larger portion of the deduction. This encourages reinvestment in the business and can improve cash flow. The minimum QBI deduction ensures that even smaller businesses with modest profits can benefit, promoting broad-based entrepreneurial activity.
Coordination with Other Tax Provisions
The QBI deduction continues to operate independently of other deductions and does not affect certain tax calculations. The deduction allowed under section 199A does not reduce net earnings from self-employment under section 1402 or net investment income under section 1411. Treasury Regulation 1.199A-1 Additionally, OBBBA specifies that the new itemized deduction limitation will be ignored for purposes of calculating the Section 199A deduction for Qualified Business Income (QBI). This matters because taxable income is used both in the calculation of QBI (which phases down above certain levels of taxable income) and the calculation of the deduction itself (which is limited to 20% of the household’s taxable income).
The changes to Section 199A under the One Big Beautiful Bill represent a thoughtful evolution of the deduction that maintains its core structure while providing enhanced benefits for active business owners and greater certainty through permanent extension. These modifications should encourage continued entrepreneurial activity and business investment while providing meaningful tax relief to pass-through business owners across various income levels.
Sources
- Treasury Regulation 1.199A-6
- Treasury Regulation 1.199A-1
- Tax Foundation
- One Big Beautiful Bill Act: Sec. 70105. Extension and enhancement of deduction for qualified business income
- IRC § 199A(a)
- IRS IRM 21.7.4 Income Taxes/Information Returns
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