How are pass-through entity (PTE) deductions and limitations affected, especially for specified service trades or businesses (SSTBs) under the One Big Beautiful Bill?

by | Aug 7, 2025 | Business Taxes

Here’s what HIVE AI had to say about “How are pass-through entity (PTE) deductions and limitations affected, especially for specified service trades or businesses (SSTBs) under the One Big Beautiful Bill?”:

Changes to Pass-Through Entity (PTE) Deductions and Limitations for Specified Service Trades or Businesses (SSTBs) Under the One Big Beautiful Bill

The One Big Beautiful Bill Act (OBBBA) introduces significant modifications to pass-through entity deductions and limitations, particularly affecting specified service trades or businesses (SSTBs). These changes represent both enhancements and restrictions that fundamentally alter the tax landscape for pass-through business owners and their treatment under Section 199A.

Permanent Extension and Enhancement of Section 199A Pass-Through 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 legislation introduces a minimum deduction provision that particularly benefits smaller pass-through entities. The law also provides a $400 minimum deduction amount for taxpayers with $1,000 or more of active qualified business income. Tax Foundation This ensures that even businesses with modest profits can receive meaningful tax benefits from the Section 199A framework.

Enhanced Phase-In Thresholds for SSTB Limitations

One of the most significant changes affects the income thresholds at which SSTB limitations begin to apply. The OBBBA expands the phase-in ranges for specified service trades or businesses, increasing the threshold from $50,000 to $75,000 for individual filers and from $100,000 to $150,000 for joint filers. This modification means that more SSTB owners will be able to claim a larger portion of the Section 199A deduction before facing complete phase-out.

Under current law, business owners with taxable income over the applicable threshold – $197,300 for single filers and $394,600 for joint – are subject to a phaseout range of $50,000 (single) or $100,000 (joint). For owners of a Specified Service Trade or Business (SSTB) – such as doctors, lawyers, consultants, accountants, financial advisors, athletes, or artists – the deduction phases out entirely over their applicable income range.

The enhanced phase-in ranges create more favorable treatment for SSTB owners with incomes just above the threshold amounts. For instance, a married SSTB owner with $80,000 of income above the threshold would lose $80,000 ÷ $100,000 (the total phaseout range for married filers) = 80% of their deduction. Once taxable income exceeds the threshold by $100,000 or more, the deduction is fully eliminated. Under the new expanded ranges, this same taxpayer would face a more gradual phase-out over the larger $150,000 range.

Continued Definition and Scope of SSTBs

The fundamental definition of specified service trades or businesses remains unchanged under the OBBBA. An SSTB is any trade or business providing services in the field of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, investing and investment management, trading or dealing in securities, partnership interests, or commodities, or any other trade or business where the principal asset is the reputation or skill of one or more of its employees or owners. IRS – Instructions for Form 1065, U.S. Return of Partnership Income

The regulations provide additional specificity regarding reputation and skill-based businesses. The term “any trade or business where the principal asset is the reputation or skill of one or more of its employees or owners” means any trade or business that consists of (a) a trade or business in which a person receives fees, compensation, or other income from endorsing products or services; (b) a trade or business in which a person licenses or receives fees, compensation, or other income for the use of an individual’s image, likeness, name, signature, voice, or trademark, or any other symbols associated with the individual’s identity; or (c) receiving fees, compensation, or other income for appearing at an event or on radio, television, or another media format. IRS – Instructions for Form 1065, U.S. Return of Partnership Income

Application of SSTB Limitations to Pass-Through Entities

The SSTB limitations continue to apply at the individual owner level for pass-through entities, regardless of the owner’s level of participation in the business. If a trade or business conducted by a relevant passthrough entity (RPE) or PTP is an SSTB, this limitation applies to any direct or indirect individual owners of the business, regardless of whether the owner is passive or participated in any specified service activity.

However, the limitations do not apply to all taxpayers. The SSTB limitation does not apply to individuals with taxable income below the threshold amount as defined in § 1.199A–1(b)(12). For taxpayers with income within the phase-in range, a phase-in rule, provided in § 1.199A–1(d)(2), applies to individuals with taxable income within the phase-in range, allowing them to take into account a certain “applicable percentage” of QBI, W–2 wages, and UBIA of qualified property from an SSTB.

Impact on Pass-Through Entity Reporting and Compliance

Pass-through entities must continue to provide detailed information to their owners regarding SSTB status and related calculations. SSTBs and PTPs cannot be aggregated with any other trade or business. So, if the aggregation box is checked, the “SSTB” and “PTP” boxes for that specific aggregated trade or business should not be checked. IRS – Instructions for Form 1041 and Schedules A, B, G, J, and K-1, U.S. Income Tax Return for Estates and Trusts

The reporting requirements ensure that beneficiaries and owners receive appropriate information for their individual Section 199A calculations. The trust or estate must report to each beneficiary their allocable share of all apportioned items that are QBI or qualified PTP items for each trade or business the trust or estate owns directly or indirectly. IRS – Instructions for Form 1041 and Schedules A, B, G, J, and K-1, U.S. Income Tax Return for Estates and Trusts

Exclusion of Tips from QBI for SSTB Owners

The OBBBA introduces a specific exclusion that affects SSTB owners who receive tips. Section 199A(c)(4) is amended by striking ” and ” at the end of subparagraph (B), by striking the period at the end of subparagraph (C) and inserting ” , and ” , and by adding at the end the following new subparagraph: “(D) any amount with respect to which a deduction is allowable to the taxpayer under section 224(a) for the taxable year.” One Big Beautiful Bill Act: Sec. 70201. No tax on tips

This provision ensures that amounts eligible for the new tips deduction cannot also be included in qualified business income calculations. For SSTB owners, this creates an additional layer of complexity, as the tips must not be earned through an SSTB as defined in IRC Section 199A (e.g., lawyers, accountants, and financial advisors are excluded, though musicians, artists, and entertainers – who often do receive tips – are also excluded).

Preservation of Pass-Through Entity Tax (PTET) Benefits

One of the most significant aspects of the OBBBA for pass-through entity owners is what it does not change. One thing of note for owners of pass-through businesses (e.g., partnerships and S corporations) is that the final version of OBBBA does not include any restrictions on [PTET], which allow the owners of such businesses to effectively circumvent the SALT deduction cap by structuring their state tax payments as a business expense (which is still fully deductible) rather than a personal expense (which is subject to the SALT deduction cap).

This preservation is particularly valuable for high-income pass-through entity owners in high-tax states. Although the higher deduction cap makes it less likely that even many affluent business owners will need to rely on PTETs to fully deduct their state tax payments, higher-earning partners and owners will still have that as an option going forward.

Coordination with Other Business Provisions

The enhanced Section 199A provisions coordinate with other business tax incentives that have been made permanent or enhanced under the OBBBA. The permanent restoration of 100% bonus depreciation and increased Section 179 limits provide additional benefits for pass-through entities making capital investments.

The restoration of 100% bonus depreciation for qualified property and the increased Section 179 expensing limits ($2.5 million with a $4 million phase-out threshold) provide powerful incentives for capital investment. A new 100% deduction for qualified production property further supports manufacturing investments. These provisions allow businesses to significantly reduce their taxable income in the year of acquisition, improving cash flow and encouraging modernization.

Impact on Different Types of Pass-Through Entities

The changes affect different types of pass-through entities in varying ways. For partnerships, the SSTB determination continues to be made at the entity level, but the limitations apply at the partner level. Each PTP must determine its QBI under the rules of § 1.199A-3 for each trade or business in which the PTP is engaged in directly. The PTP must also determine whether any of the trades or businesses it is engaged in directly is an SSTB. Treasury Regulation 1.199A-6

For publicly traded partnerships, special reporting requirements continue to apply. Each PTP is required to separately identify and report the information described in paragraph (c)(1) of this section on Schedules K-1 issued to its partners. Each PTP must also determine and report any qualified REIT dividends or qualified PTP income or loss received by the PTP including through an RPE, a REIT, or another PTP. Treasury Regulation 1.199A-6

Long-Term Planning Implications for SSTB Owners

The permanent nature of the Section 199A deduction, combined with the enhanced phase-in ranges, provides SSTB owners with greater certainty for long-term tax planning. The expanded thresholds mean that more SSTB owners will be able to benefit from at least partial Section 199A deductions, even as their incomes grow.

However, SSTB owners must continue to navigate the complex interaction between the Section 199A limitations and other tax provisions. The exclusion of tips from QBI calculations and the continued application of wage and capital limitations for high-income taxpayers create ongoing compliance challenges that require careful planning and documentation.

The changes to pass-through entity deductions and SSTB limitations under the One Big Beautiful Bill Act represent a balanced approach that provides enhanced benefits through expanded phase-in ranges and permanent extension while maintaining the fundamental policy framework that limits benefits for specified service businesses. The preservation of PTET benefits and coordination with other enhanced business provisions create a comprehensive package that should encourage continued investment in pass-through businesses while maintaining appropriate limitations on service-based enterprises.

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