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Pass-Through Business Owners Get Long-Term Tax Certainty

Small business owners operating as sole proprietors, partnerships, or S corporations received significant news when the One Big Beautiful Bill Act became law on July 4, 2025. The 20% qualified business income deduction, which had been scheduled to expire at the end of 2025, is now permanent.

The QBI deduction allows eligible non-corporate taxpayers to deduct up to 20% of their qualified business income from pass-through entities. This effectively reduces the top marginal tax rate for qualifying business owners from 37% to approximately 29.6%, creating greater parity with C corporations taxed at the flat 21% rate.

For tax attorneys advising business clients, the permanence of this deduction changes the planning landscape. As discussed in Tax Season 2025: How the Big Beautiful Bill Act is Changing the Filing Experience, OBBBA made several key changes to the tax code that affect both individual and business taxpayers.

The original TCJA provision created uncertainty for business structure decisions. Owners considering whether to maintain pass-through status or convert to C corporation status now have clearer long-term projections to work with.

Expanded Phase-In Ranges Benefit More Business Owners

Beyond permanence, OBBBA expanded the income ranges where QBI deduction limitations phase in. This change takes effect for tax years beginning after December 31, 2025.

Under the prior rules, limitations on the deduction began phasing in at certain income thresholds and were fully applied within a $50,000 range for single filers or $100,000 for joint filers. The new law expands these ranges to $75,000 for single filers and $150,000 for joint filers.

According to RSM analysis, this expanded window may provide meaningful benefits for business owners near the upper income limits. More taxpayers can now qualify for at least a partial deduction before limitations fully apply.

For 2025, the income threshold where limitations begin is $197,300 for single filers and $394,600 for joint filers. In 2026, with the expanded phase-in range and inflation adjustments, joint filers may see full limitations not apply until income exceeds approximately $550,000.

New Minimum Deduction Helps Smaller Businesses

OBBBA introduced a new floor for the QBI deduction that benefits active small business owners. Beginning in 2026, taxpayers with at least $1,000 in aggregate qualified business income from all active qualified trades or businesses will receive a minimum deduction of $400.

This minimum applies only to businesses where the taxpayer materially participates. Passive investors do not qualify. Both the $1,000 QBI threshold and the $400 minimum deduction will be indexed for inflation starting in 2027.

The OnPay analysis notes that this change ensures even smaller businesses receive some tax relief from the provision. Previously, various limitation factors could reduce the deduction to zero for some taxpayers.

For attorneys advising small business clients, this minimum deduction adds another factor to consider when evaluating entity structure and owner compensation strategies.

Service workers should also review the new tips and overtime deductions available under OBBBA. Details on claiming these benefits appear in No Tax on Tips and Overtime: What Service Workers Need to Know for 2025 Filing.

Specified Service Businesses Still Face Restrictions

The QBI deduction continues to have limitations for specified service trades or businesses. These include businesses in health, law, accounting, consulting, athletics, financial services, and performing arts fields.

SSTB owners above the phase-in threshold cannot claim the QBI deduction for their service business income. The expanded phase-in ranges do provide some relief, allowing more SSTB owners to claim partial deductions before the complete exclusion applies.

Tax attorneys should note that professional service firms, including law practices, fall under SSTB classification. Partners and shareholders in these firms need to monitor their income levels relative to the threshold amounts.

The deduction remains subject to wage and property limitations for taxpayers above the threshold amounts. Businesses that pay sufficient W-2 wages or have significant qualified property may preserve more of the deduction even at higher income levels.

Planning Considerations for Business Owners

The permanence of the QBI deduction justifies revisiting entity structure decisions and long-term tax planning models. Business owners should consider:

• Reviewing compensation structures to optimize between W-2 wages and pass-through income
• Evaluating whether current entity classification still serves tax objectives
• Assessing whether the expanded thresholds affect retirement contribution strategies
• Documenting material participation for businesses claiming the minimum deduction

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About the Author

Jim Toppe is the founder of Toppe Consulting, a digital marketing agency specializing in law firms. He holds a Master of Science in Management from Clemson University and teaches Business Law and Marketing at Greenville Technical College. Jim also serves as publisher and editor for South Carolina Manufacturing, a digital magazine. His unique background combines legal knowledge with digital marketing expertise to help attorneys grow their practices through compliant, results-driven strategies.

Works Cited

“Permanent QBI Deduction Provides Some Tax Planning Certainty.” RSM US LLP, 16 July 2025, rsmus.com/insights/services/business-tax/obbba-tax-qbi-deduction.html.

“Section 199a QBI Deduction Deep Dive: What the OBBBA Changes Mean for Your Business.” OnPay, 18 Sept. 2025, onpay.com/insights/qbi-deduction-obbba-updates/.

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