When Does the Qualified Business Income Deduction Expire?

The Qualified Business Income (QBI) deduction, also known as the Section 199A deduction, was a significant tax benefit introduced for many pass-through business owners and self-employed individuals. It has provided a valuable reduction in taxable income for a broad range of taxpayers.

Understanding the QBI Deduction

The QBI deduction allows eligible self-employed individuals and owners of certain pass-through entities to deduct up to 20% of their qualified business income. Pass-through entities include S corporations, partnerships, and sole proprietorships, where business income is “passed through” to the owners’ personal tax returns.

This provision helps to lower an individual’s overall taxable income. It applies to income earned from a qualified trade or business and can be claimed regardless of whether the taxpayer itemizes deductions or takes the standard deduction.

The Specific Expiration Date

The QBI deduction is a temporary provision enacted under the Tax Cuts and Jobs Act (TCJA) of 2017. The deduction is scheduled to expire for tax years beginning after December 31, 2025.

The last tax year for which this deduction can be claimed is the 2025 tax year. This means that when taxpayers file their 2025 tax returns in 2026, they can still utilize the QBI deduction. However, for tax years starting January 1, 2026, and beyond, the deduction will no longer be available unless Congress takes action to extend or make it permanent.

Consequences of the Deduction Ending

The expiration of the QBI deduction will likely lead to an increase in the taxable income for many pass-through business owners and self-employed individuals. Without this deduction, a larger portion of their business earnings will be subject to federal income tax. This absence could result in a higher overall tax liability for these taxpayers.

For instance, some analyses suggest that marginal tax rates on business income could increase significantly, impacting the net income available to business owners. This change could affect the financial planning for businesses and individuals who have structured their operations and relied on the tax savings provided by this deduction. Businesses might find they have less cash flow for reinvestment, growth, or other operational needs.

Preparing for the Change

In anticipation of the QBI deduction’s expiration, taxpayers and business owners have an opportunity to review their current financial and tax strategies. Consulting with a qualified tax professional is a prudent step to understand the specific implications for one’s unique situation. This professional guidance can help in assessing potential tax increases and identifying ways to mitigate the impact.

Business owners might consider re-evaluating their current business structures to determine if alternative entity types could offer more favorable tax treatment in a post-QBI deduction environment. Proactive tax planning is important to respond effectively to these upcoming changes. This includes looking into other available tax credits or deductions that could help offset increased tax burdens.