Thanks to the recently passed One Big Beautiful Bill Act (OBBBA), the qualified business income (QBI) deduction has been revamped. This tax break is now permanent and even more valuable than before.
What you’ll learn
What you’ll learn
This article is authored by OnPay, a top-rated payroll provider for small businesses with more than 30 years of experience in payroll, taxes, and small business compliance.
Key takeaways
- The QBI deduction is now permanent – you can count on this 20% tax break for years to come
- Income thresholds have increased – more businesses can now qualify for the full deduction
- New minimum deduction added – even smaller businesses can benefit with a $415 minimum deduction
Whether you’re a new entrepreneur or a seasoned business owner, understanding the QBI deduction is important. Doing so can be challenging, but OnPay is here to help make sense of things. In this guide, we explain the QBI deduction, outline the recent OBBBA changes, and shed light on how your business could be impacted.
What is the qualified business income (QBI) deduction?
Simply put, if you run a sole proprietorship, partnership, or S corporation, the QBI deduction allows you to potentially deduct up to 20% of business income on your income tax return. The QBI deduction was originally introduced with the 2017 Tax Cuts and Jobs Act.
Whether you are launching a new venture or are a seasoned business owner, the QBI deduction is designed to help you keep more of what you earn. Here’s a few examples of how it could benefit you.
- Did you earn $150,000 of business income? You might only pay taxes on $120,000.
- Do you have a $30,000 side business? The QBI deduction could help lower your tax bill.
What counts as qualified business income?
Qualified business income is basically all of your business’ revenues less business expenses. It excludes the following items:
- Investment gains and losses
- Dividends from stocks
- Interest income
Essentially, QBI is the net profit earned (before taxes) from running your business, not from performing unrelated activities and investing.
Who can use this deduction?
The QBI deduction is available to most business owners with “pass-through” income – businesses where profits and losses pass through to the operators’ personal tax returns. This includes:
- Sole proprietors
- Partnership owners
- S Corporation shareholders
- Some trust and estate beneficiaries
Higher income thresholds for 2027
The IRS sets annual income limits, and they’ve been adjusted to account for inflation during the 2027 tax year. This is to keep high earners from taking advantage of the QBI deduction.
- Single filers: You qualify for the full 20% deduction if your taxable income is $208,300 or less. The deduction gradually phases out between $208,300 and $283,300.
- Married couples filing jointly: You receive the full 20% deduction if your taxable income is $416,600 or less. The phase-out range applies between $416,600 and $566,600.
- Married filing separately: The full deduction applies up to $208,325, phasing out between $208,325 and $283,325.
Is your income below these thresholds? You’ll be able to claim the full 20% deduction regardless of your business type, even when operating a Specified Service Trade or Business (SSTB) such as law, medicine, consulting, or accounting.
Once your taxable income climbs into the phase-out range, your deduction may be limited by your W-2 wages paid and the unadjusted basis of qualified business property. If you own an SSTB and earn above the upper limit ($283,300 for single filers or $566,600 for joint filers), the deduction is completely phased out.
How to report your QBI deduction
Claiming the QBI deduction is straightforward. You need to use one of the following two forms:
- Form 8995 (the simple version) for most taxpayers
- Form 8995-A (the detailed version) if your income is above the threshold or you have a specified service business
For good measure, it’s wise to leverage tax software or a tax professional to pinpoint the appropriate form for your business.
How does the One Big Beautiful Bill factor in?
The OBBBA made several important changes to the QBI deduction. Read on for the specifics.
It’s now permanent
Prior to the OBBBA, the QBI deduction was set to expire at the end of 2025. Now it’s permanent, which should bolster your finances for years to come.
Higher income limits
The income thresholds at which limitations kick in have increased quite a bit. This means more business owners can now take advantage of the full 20% deduction.
New minimum deduction benefit for small businesses
Under the One Big Beautiful Bill Act (OBBBA), small business owners who might otherwise see little to no tax break now have a guaranteed floor to start with.
For tax year 2027, if your business generates at least $1,030 in active qualified business income, you qualify for a minimum QBI deduction of $415.
The takeaway is that many micro-businesses, freelancers, and side-hustlers get an immediate, guaranteed tax break without having to worry about complex wage formulas or asset calculations.
Important limitations to be aware of
The QBI deduction is generous, but, as noted below, it does have some qualification limitations.
Specified service businesses: If you’re in certain professional services, such as healthcare, law, consulting, accounting, or financial services, special limitations may apply, once your income exceeds the thresholds mentioned above.
Income-based restrictions: Higher earners face additional limitations designed to ensure the deduction primarily benefits active business owners rather than passive investors.
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Planning tips for 2025 and beyond
Now that the QBI deduction is permanent, be sure to consider its impact when formulating tax strategies and projections. To optimize your finances, take the following steps:
Watch your income level: Keep track of where you stand relative to the QBI deduction’s income thresholds. Sometimes a small adjustment in timing can make a big difference in your deduction.
Reinvest your savings: Consider putting tax savings back into your business. Whether it’s new equipment, marketing, or expanding your team, reinvestment can help grow your business while creating more QBI for future years.
Stay informed: While the QBI deduction is now permanent, tax laws can change. Stay abreast of updates that could impact your business.
Due diligence comes with the QBI deduction
The changes to the QBI deduction enacted by the One Big Beautiful Bill Act mark a significant win for small business owners. By making this 20% deduction permanent and more accessible, Congress has given entrepreneurs a tool to reduce their tax burden.
Whether you’re contemplating launching a new business or running a long-established operation, understanding and properly claiming the QBI deduction is a surefire way to enhance your bottom line. That said, making sense of all the details can be challenging. Moreover, what works for one business might not work for another. Consider working with a qualified tax professional to make sure you’re getting the maximum benefit from this and other valuable deductions.
This article is authored by OnPay, a top-rated payroll provider for small businesses with more than 30 years of experience in payroll, taxes, and small business compliance.