When Did the QBI Deduction Start and Who Benefits From It?
Uncover the origins and impact of the Qualified Business Income (QBI) deduction, a key tax provision for certain business owners.
The Qualified Business Income (QBI) deduction offers a tax provision for many business owners. It aims to provide tax relief for individuals earning income through certain business structures. Understanding its origins and operational framework is helpful for navigating business taxation.
The Enactment of QBI
The Qualified Business Income (QBI) deduction was established as part of the Tax Cuts and Jobs Act (TCJA) of 2017, signed into law on December 22, 2017. The QBI deduction, also known as Section 199A of the Internal Revenue Code, applies to tax years beginning after December 31, 2017.
The QBI deduction aimed to provide tax relief for pass-through entities. This measure sought to create a more level playing field with C corporations, whose tax rates were significantly reduced by the TCJA. Initially, this deduction was scheduled to expire on December 31, 2025, along with many other TCJA provisions. However, the “One Big Beautiful Bill Act,” signed into law on July 4, 2025, made the QBI deduction a permanent provision.
Understanding the Qualified Business Income Deduction
The QBI deduction allows eligible taxpayers to deduct up to 20% of their qualified business income. Qualified business income refers to the net amount of income, gain, deduction, and loss from any qualified trade or business. This includes income from partnerships, S corporations, sole proprietorships, and certain trusts.
The deduction is subject to several limitations based on the taxpayer’s taxable income, the amount of W-2 wages paid by the business, and the unadjusted basis immediately after acquisition (UBIA) of qualified property. The deduction cannot exceed 20% of the taxpayer’s taxable income. When taxable income exceeds certain thresholds, the deduction may be limited by either 50% of the W-2 wages paid by the business or a combination of 25% of W-2 wages plus 2.5% of the UBIA of qualified property. This property includes depreciable tangible property used in the business to produce QBI.
Who Benefits from QBI
The QBI deduction is available to owners of pass-through entities, which report business income on the owner’s personal tax return. This includes sole proprietorships, partnerships, S corporations, and limited liability companies (LLCs) taxed as such. Certain trusts and estates may also be eligible for the deduction. Income earned as an employee or through a C corporation does not qualify for this deduction.
Eligibility for the QBI deduction can be affected by the type of business and the taxpayer’s taxable income. Businesses classified as Specified Service Trades or Businesses (SSTBs) are subject to specific rules. SSTBs include fields such as health, law, accounting, actuarial science, performing arts, consulting, athletics, and financial services.
For taxpayers with income below certain thresholds, SSTBs are treated similarly to other businesses for QBI deduction purposes. However, for higher-income taxpayers, the QBI deduction for SSTBs can be phased out or entirely eliminated as income increases above specific limits.