This series of blog posts is intended to highlight some key tax planning strategies resulting from the sweeping tax changes contained in the One Big Beautiful Bill Act (OBBBA). One notable modification that provides beneficial opportunities for taxpayers pertains to the Section 199A Qualified Business Income (QBI) Deduction.
Background
The Section 199A deduction was first introduced into law with the passing of the Tax Cuts and Jobs Act (TCJA) in 2017. This deduction was designed to allow owners of pass-through entities or sole proprietorships to deduct up to 20% of their qualified business income (QBI), not to exceed 20% of taxable income. It also allows eligible taxpayers to deduct up to 20% of qualified REIT dividends and/or Publicly Traded Partnership income on their personal 1040s. Although the QBI deduction has been in place for several years, the OBBBA introduced several significant tax benefits, which are discussed in the following sections.
Changing from Temporary to Permanent
The TCJA intended the Section 199A provision to expire (sunset) on December 31, 2025, but the OBBBA made the QBI deduction permanent. This change allows tax planning to become more efficient since taxpayers can count on the opportunity being available each year. However, some planning will still be required due to increased limitations and calculations for individuals who are considered to be SSTB owners or with income levels within the phase-in ranges.
Increased Limitations
The QBI deduction is subject to income limitations. The rules differ depending on the type of business, with two main categories: Qualified Trades or Businesses (QTBs), and Specified Service Trades or Businesses (SSTBs). The distinction between QTBs and SSTBs is central to eligibility and limitation rules.
- A QTB is defined broadly by IRC Section 199A to include the majority of active, profit‑driven business activities (such as manufacturing, retail, construction, real estate operations, and many service businesses)
- SSTBs, which are defined as businesses where the principal asset is the reputation or skill of its owners or employees (examples include health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, and investing), are excluded by the IRS fom the QTB classification
Taxpayers with income below certain thresholds can generally take the full deduction (applies to both QTBs and SSTBs). The 2026 phase-in thresholds are: $403,500 for joint filers (up from $394,600 for 2025), and $201,750 for single individuals and heads of households (up from $197,300 for 2025). For 2026, the phase-out income threshold is $553,500 for married couples filing jointly and $276,750 for single filers.
Additional limits of W-2 wages and cost of qualified property play a factor in determining how much of the deduction can be taken. Starting in 2026, the OBBBA increases the phase-in ranges for wage and investment limits from $100,000 to $150,000 for married couples who file jointly, and from $50,000 to $75,000 for all other taxpayers. The top level phaseout will have an annual inflation adjustment.
Owners of SSTBs face additional phase‑out limitations once income exceeds the thresholds. For SSTB owners with income that falls within the phase-in limitations, the QBI deduction is reduced based on a percentage of income above the threshold. SSTB owners can become ineligible to claim any QBI deduction once their income exceeds the upper threshold.
Minimum QBI Deduction
One provision that helps benefit smaller businesses and those with income in the phase-out territory is the minimum QBI deduction, which became effective in 2026. In previous years, the deduction could go down to zero if a taxpayer’s income was too high. The OBBBA imposed a minimum deduction of $400 if QBI is at least $1,000, and the taxpayer materially participates in the trade or business. For 2026, QTB owners can claim the greater of the start calculation or the $400 minimum deduction. This change means that the $400 minimum can benefit taxpayers over the phaseout limits, but not if their income is only from SSTBs, which are fully excluded.
Key Takeaways
Making the Section 199A deduction permanent has created many tax planning opportunities for the future. As a result of the increased limitations, some pass-through owners who did not previously qualify for QBI deductions may now qualify, and some may be entitled to a larger deduction than under prior law. Planning strategies used to reduce the impact of the limits in prior years may no longer be necessary for some taxpayers.
Please contact a GYF professional for expert advice related to the Section 199A decution as well as other tax planning strategies.
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