Section 199A of the Internal Revenue Code allows eligible taxpayers to deduct up to 20 percent of their qualified business income (QBI) from pass-through entities like sole proprietorships, partnerships, S corporations, and certain trusts and estates (IRS). The deduction applies to tax years beginning after December 31, 2017, and was initially scheduled to sunset at the end of 2025. However, the One Big Beautiful Bill Act (OBBBA), signed into law in July 2025, amended IRC §199A(g) to permanently eliminate the scheduled 2026 sunset, making the QBI deduction a permanent feature of the tax code.
The deduction can reduce taxable income and increase after-tax cash flow. However, for high earners, it comes with complex limitations based on income levels, business type, and wage or property thresholds.

What qualifies as a pass-through business

QBI includes the net amount of qualified items of income, gain, deduction, and loss from a qualified trade or business. It does not include W-2 wages earned as an employee or guaranteed payments to partners. QBI also excludes capital gains and losses, dividends, and interest income not allocable to the trade or business.

Only income effectively connected with a U.S. trade or business qualifies for the deduction

Income thresholds and phaseouts

For 2025, taxpayers filing jointly can claim the full QBI deduction if taxable income does not exceed $394,600. For single filers, the limit is $197,300. Above these thresholds, limitations based on W-2 wages paid and the unadjusted basis of qualified property begin to phase in and impact the QBI calculation. For 2025, the W-2 and property limitation phaseout range is unchanged and remains at $50,000 (upper-taxable income threshold amount of $247,300) for single filers and $100,000 (upper-taxable income threshold amount of $494,600) for joint filers.

In 2026 under the OBBBA, the phaseout ranges are increased to $75,000 for single filers and $150,000 for joint filers. These increased phaseout ranges under the OBBBA mean more high-income owners can qualify for the deduction without needing to meet the wage or property tests.

Specified service trades or businesses (SSTBs)

Certain service businesses, including those in law, health, accounting, consulting, athletics, financial services, and the performing arts, are classified as specified service trades or businesses (SSTBs). For these businesses, the deduction phases out entirely above the income threshold limits ($247,300 for single filers and $494,600 for joint filers in 2025). Under the OBBBA, these income threshold limits will be higher due to the increased phaseout threshold of $75,000 for single filers and $150,000 for joint filers.

To remain eligible, owners can explore techniques like income deferral, splitting income with lower-income family members, or using charitable remainder trusts to reduce taxable income. Contributing appreciated assets to a charitable remainder trust can reduce current taxable income while supporting philanthropic goals.

Another strategy involves separating non-SSTB activities from a larger SSTB operation. If a business performs both qualified and disqualified services, a spin-off or restructuring might carve out non-SSTB components. However, the IRS requires these divisions to be legitimate and economically meaningful, not simply cosmetic changes made to gain tax advantages.

Maximizing contributions to retirement plans like Solo 401(k)s, SEP IRAs, or defined benefit plans can also reduce taxable income below the QBI threshold. These plans allow high contribution limits, especially for older owners. Lowering income in this way secures the QBI deduction and provides long-term tax-deferred growth.

Planning strategies for high-income owners

Planning strategies for high-income owners focus on optimizing their tax situation and overall financial structure.

Entity structure optimization: For instance, electing S corporation status can significantly reduce self-employment taxes. This allows owners to strategically decide on how to allocate their compensation between salary and distributions, maximizing tax benefits.

Only the income that is not classified as a W-2 wage qualifies for Qualified Business Income (QBI) deductions, making this planning essential for optimizing tax efficiency.

This strategy reduces tax liability while supporting their business growth.

Income deferral and splitting: Spreading income across tax years or among family members can help remain under the threshold, particularly when paired with gifting strategies or trust planning.

Aggregating businesses: If you own multiple entities with shared ownership and related operations, IRS rules under Reg. §1.199A-4 allow for aggregation. Combining income, wages, and property across businesses can help you meet wages and UBIA thresholds.

The deduction isn’t automatic

Taxpayers must substantiate all wage, property, and ownership data and properly allocate income across businesses. Reasonable compensation must be paid to S corporation shareholders. Planning should occur before year-end to make necessary adjustments.

Valuing the deduction

At the top marginal rate of 37 percent, a 20 percent deduction on $500,000 of QBI reduces taxable income by $100,000, which could save about $37,000 in federal taxes.

Final thoughts

The OBBBA clarified and expanded access to the Section 199A deduction, especially for high earners. Planning remains essential. Before year-end, owners should work closely with their tax advisors to assess entity structure, income thresholds, and SSTB status.

Summary Table of Key Changes:

Feature	Pre-OBBBA Law (2025)	OBBBA (2026 and after)
Deduction Expiration	Expires after 2025	Permanent
Phase-in Range (Single)	$50,000	$75,000
Phase-in Range (Joint)	$100,000	$150,000
SSTB Deduction	Phased out over $50k/$100k range	Phased out over $75k/$150k range
W-2 Wage/Property Limitation	Phased in over $50k/$100k range	Phased in over $75k/$150k range
Minimum Deduction	None	$400 (if $1,000+ active QBI)