What are the main changes that OBBBA made to QBI deductions?
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The One Big Beautiful Bill Act (OBBBA) made several significant changes to the Qualified Business Income (QBI) deduction under section 199A. Below is a comprehensive summary of the main changes, including legal details, effective dates, and relevant nuances:
1. Permanence of the QBI Deduction
Prior Law:
The QBI deduction, which allows eligible noncorporate taxpayers (sole proprietors, partnerships, S corporations, and some trusts and estates) to deduct up to 20% of their qualified business income, was set to expire for tax years beginning after December 31, 2025.
OBBBA Change:
The 20% QBI deduction is made permanent for tax years beginning after December 31, 2025. The expiration date is removed from IRC §199A(i), ensuring that eligible taxpayers can continue to claim the deduction indefinitely.
2. Expansion of Phase-In Thresholds for Limitations
Prior Law:
The QBI deduction is subject to limitations based on W-2 wages and the unadjusted basis of qualified property, as well as restrictions for specified service trades or businesses (SSTBs). These limitations are phased in over a window of $50,000 above the income threshold for single filers ($100,000 for joint filers).
OBBBA Change:
The phase-in window for these limitations is expanded:- For single filers: from $50,000 to $75,000 above the threshold amount.- For joint filers: from $100,000 to $150,000 above the threshold amount.
This means more taxpayers with income just above the threshold can benefit from a partial deduction before the limitations fully apply.
3. Introduction of a Minimum Deduction for Active Qualified Business Income
Prior Law:
There was no minimum QBI deduction; the deduction could be reduced to zero if the taxpayer’s qualified business income or other factors were too low.
OBBBA Change:
A new minimum deduction is established:- For taxpayers with at least $1,000 in aggregate qualified business income from all active qualified trades or businesses (where the taxpayer materially participates), the deduction is the greater of the regular QBI deduction or $400.- Both the $1,000 QBI threshold and the $400 minimum deduction are indexed for inflation for tax years beginning after 2026.
4. Technical and Conforming Amendments
- The calculation of taxable income for purposes of the QBI deduction is clarified to be made without regard to the new limitation on itemized deductions under section 68.
- The deduction remains unavailable for income from specified service trades or businesses (SSTBs) above the phase-in window, and the core limitations (W-2 wages, qualified property, SSTB status) remain unchanged.
5. State Tax Implications
- The permanence and technical changes to the QBI deduction will flow through to state tax codes in states that conform to the federal Internal Revenue Code, either automatically (rolling conformity) or upon legislative update (static conformity). The impact will vary by state depending on their conformity approach.
6. Effective Date
- All these changes apply to taxable years beginning after December 31, 2025.
7. Summary Table of Key Changes
8. Practical Implications
- Expanded eligibility: More taxpayers, especially those near the upper end of the phase-in window, may now qualify for a partial deduction.
- Certainty for planning: The deduction’s permanence allows for more reliable long-term tax planning for pass-through business owners.
- Minimum benefit: Even taxpayers with modest active QBI will receive a minimum deduction, provided they meet the $1,000 QBI threshold and material participation requirements.
- Limitations remain: The deduction is still subject to the same core limitations (W-2 wages, qualified property, SSTB status) for high-income taxpayers.
In summary: The OBBBA made the QBI deduction permanent, expanded the phase-in window for limitations, introduced a minimum deduction for active business income, and clarified technical aspects of the deduction. These changes provide greater certainty and potentially broader access to the deduction for eligible pass-through business owners.
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