Main Street Tax Certainty Act: What It Means for QBI
Explore the legislative effort to make the 20% pass-through deduction permanent and the stability this change could bring to business tax planning.
The Main Street Tax Certainty Act is a legislative proposal aimed at making a tax deduction permanent. This deduction, known as the Qualified Business Income (QBI) deduction, provides tax relief to pass-through businesses. Under current law, this tax benefit is temporary and is scheduled to expire after December 31, 2025, creating uncertainty for business owners.
The Qualified Business Income Deduction
The Qualified Business Income (QBI) deduction, established under Section 199A of the tax code, originated from the Tax Cuts and Jobs Act of 2017 (TCJA). This provision was designed to lower the tax burden on businesses that are not structured as traditional C corporations. It allows eligible business owners to deduct up to 20% of their qualified business income from their individual income taxes. This was intended to create more equitable tax treatment between large corporations and smaller businesses.
A defining characteristic of the QBI deduction is its temporary nature. When the TCJA was enacted, tax changes for C corporations were made permanent, but the relief for pass-through entities was given a limited lifespan. Without new legislation, the deduction will disappear from the tax code at the end of 2025.
Determining Eligibility for the Deduction
Eligibility for the Qualified Business Income deduction centers on the structure of the business. The deduction is available to owners of “pass-through entities,” where the business itself does not pay income tax. Instead, income, losses, and credits “pass through” to the owners, who report them on their personal tax returns. This category includes sole proprietorships, which cover independent contractors, freelancers, and gig economy workers.
Other eligible pass-through entities are partnerships and S corporations. In a partnership, multiple owners report their share of the business’s income on their personal returns. S corporations allow profits and losses to be passed directly to the owners’ personal income without being subject to corporate tax rates. The deduction is claimed by the individual owners on Form 1040. Certain trusts and estates may also be eligible.
Calculating the Deduction Amount
The calculation of the Qualified Business Income deduction is 20% of the taxpayer’s QBI. However, for taxpayers whose taxable income exceeds certain annual thresholds, the calculation becomes more complex. For the 2025 tax year, these thresholds are $197,300 for single filers and $394,600 for those married filing jointly. Once income surpasses these levels, two limitations may apply, reducing the amount of the deduction.
The first limitation is based on the W-2 wages paid by the business. The deduction cannot exceed the greater of 50% of the W-2 wages paid, or 25% of the W-2 wages plus 2.5% of the unadjusted basis immediately after acquisition (UBIA) of all qualified property. UBIA refers to the original cost of tangible, depreciable property used in the business, such as buildings and equipment. This limitation is designed to ensure the deduction is tied to businesses that create jobs or make capital investments.
A second limitation restricts the deduction to 20% of the taxpayer’s taxable income in excess of net capital gains. This means the deduction cannot be used to reduce income that is already taxed at lower capital gains rates.
Specified Service Trade or Business Limitations
The tax code imposes more restrictive rules for what it defines as a Specified Service Trade or Business (SSTB). An SSTB is a business where the principal asset is the reputation or skill of one or more of its employees or owners. This category includes fields such as:
- Health
- Law
- Accounting
- Actuarial science
- Performing arts
- Consulting
- Athletics
- Financial services
- Brokerage services
The rules are designed to differentiate these businesses from others that may rely more heavily on capital or inventory.
For owners of an SSTB, the Qualified Business Income deduction is subject to a stricter income phase-out. The deduction for an SSTB owner starts to phase out for taxable incomes between $197,300 and $247,300 for single filers, and between $394,600 and $494,600 for those married filing jointly.
Once an SSTB owner’s taxable income exceeds the upper end of these phase-out ranges, the QBI deduction is completely eliminated. This is a departure from the rules for non-SSTB businesses, which may still receive a partial or full deduction at higher income levels, provided they meet wage or property requirements.