The QBI deduction lives on

The highest federal corporate tax rate for 2025 is 21%, compared with the top federal individual tax rate of 37%. This disparity is somewhat mitigated by the Sec. 199A qualified business income (QBI) deduction introduced by the TCJA, which allows for a deduction of up to 20% of QBI for taxpayers other than C corporations (e.g., S corporations, partnerships, and sole proprietorships). The deduction was set to expire on Dec. 31, 2025, but the act made it permanent, a fact that should be a significant factor in choosing a business’s appropriate entity classification.

The QBI deduction is also enhanced for 2026 and onward, with higher income thresholds and a guaranteed minimum deduction. However, a group of businesses cannot benefit from the QBI deduction if their owners’ income exceeds a specified limit. Careful analysis may reveal that some businesses typically considered excluded may qualify. The improved QBI deduction for 2026 and beyond requires a thorough examination of a business’s operations to maximize eligibility.

The excluded group is referred to as specified service trades or businesses (SSTBs). SSTBs include trades or businesses involving the performance of services in the following fields: 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; and any trade or business of which its principal asset is the reputation or skill of one or more of its employees.

Rather than too hastily categorizing a business as an SSTB, however, advisers should review Regs. Sec. 1.199A–5 in each situation for nuances and exceptions. For example, the performance of services in the field of health does not include the operation of health clubs or health spas that provide physical exercise or conditioning to their customers. Even though these facilities may be crucial to their patrons’ health, their business is not considered to be in the health field for purposes of determining whether they qualify as an SSTB. Similarly, while the practice of law is considered an SSTB, many of the services provided to law firms are not. For instance, companies providing printing, delivery, or stenography services to law firms are not considered to be providing services in the field of law and are not classified as SSTBs.

The regulations include many more examples of businesses that one might assume to be an SSTB but in fact are not. One involves an outpatient medical facility that engages doctors as contractors for procedures performed in the facility. The facility charges patients only a fee for use of the facility, while the doctors bill the patients directly for their services. In this case, the facility itself is not considered to be performing services in the field of health and thus is not an SSTB.

The QBI deduction is calculated at the shareholder, partner, or sole–proprietor level. As noted earlier, even if a business is classified as an SSTB, the owners may still qualify for the QBI deduction if their taxable income falls below a threshold amount, which is indexed yearly for inflation. For 2025, the inflation–adjusted threshold amount is $394,600 for married taxpayers filing jointly and $197,300 for all other taxpayers. For owners with taxable income in excess of the threshold amount, the QBI deduction is limited. For 2025, the limitation phases in over a fixed range of taxable income of $100,000 for married taxpayers filing jointly and $50,000 for all other taxpayers.

However, starting in 2026, the act increased the phase–in range for the QBI deduction limitation for SSTB owners to $150,000 above the inflation–adjusted threshold amount for the year for married taxpayers filing jointly and to $75,000 above the inflation–adjusted threshold for the year for all other taxpayers. Therefore, for 2026 and beyond, tax planners should not automatically assume that SSTB owners are ineligible for the QBI deduction. A careful review of each taxpayer’s facts and circumstances and proper computation will be essential.

The income thresholds and limitation phase–in ranges discussed above also apply when calculating the QBI deduction for businesses that are not SSTBs. Specifically, the thresholds and phase–in ranges are used in determining whether the deduction will be limited based on (1) W–2 wages or (2) W–2 wages and the unadjusted basis of qualified property (wage and property limitations). With the increased phase–in ranges under the act for the wage and property limitations, taxpayers may benefit from larger QBI deductions.

As an added benefit, the act introduces a minimum QBI deduction of $400, provided that a taxpayer’s total qualified business income from all qualified trades or businesses for the tax year is at least $1,000.

With the QBI deduction now made permanent by the act, the 20% deduction should be considered annually in tax planning for all passthrough businesses. A thorough review of business activities to confirm whether the business is an SSTB remains critical in order to fully benefit from the deduction.

Opportunities abound

Think the OBBBA is just a reinstatement of tax laws that are “old and cold”? That there is not much to it, and it will not help business save valuable tax dollars? That view completely misses the mark. Chances abound to help businesses save in the current and future years and even retroactively to prior years. A careful reading of the provisions will reveal a long list of opportunities in the areas covered here and beyond.