The 20% Business Deduction Didn’t Disappear. It Got Better.

The QBI deduction was supposed to expire after 2025. It didn't. Here's what that means for your tax bill, and how to make sure you're actually using it.

What the QBI Deduction Is

Section 199A of the tax code gives eligible pass-through business owners a deduction of up to 20% of qualified business income (QBI).

Pass-through businesses include:

• Sole proprietorships

• S-Corporations

• Partnerships and LLCs taxed as partnerships

If you run one of these entities and your business has a profit, you may be eligible to deduct 20% of that profit before calculating your federal income tax.

At $400,000 of business income, that's an $80,000 deduction. At $600,000, it's $120,000. These aren't hypotheticals, they're real numbers that show up on thousands of business owner returns every year.

The tax reform of 2017 (TCJA) created this deduction, but it was scheduled to expire after the 2025 tax year. Under tax act of 2025 (OBBBA), it got extended and was made permanent.

Who Qualifies and Who Doesn't

Not every business owner gets the full deduction. There are rules.

Income thresholds matter. For 2025:

• Below $197,300 (single) or $394,600 (married filing jointly): You generally qualify for the full 20% deduction if your business has qualified income.

• Above those thresholds: Limitations begin to apply based on W-2 wages paid by the business and the unadjusted basis of qualified property.

Specified Service Trades or Businesses (SSTBs) have stricter rules. SSTBs include consulting, law, health, financial services, and similar professional fields. Above the income thresholds, the QBI deduction phases out entirely for SSTBs.

This is where entity structure and income positioning matter. Some business owners can restructure to reduce SSTB exposure or stay within phase-out ranges. Others need to plan around it differently.

Not all income qualifies. QBI excludes:

• W-2 wages you pay yourself as an S-Corp shareholder

• Capital gains

• Investment income

• Certain foreign income
  

The calculation is more nuanced than "20% of my profit." Getting it right requires clean books and someone who knows what they're looking at.

If you're not sure whether you're using the full QBI deduction or whether your entity structure is optimized for it, that's exactly what we cover in a Free Financial Assessment

How Much Can It Actually Save?

Let's run real numbers.

A business owner with $500,000 of qualified business income and an effective federal rate of 35%:

• QBI deduction: $100,000

• Tax saved: $35,000

That's $35,000 that stays in the business, not from a complicated strategy, but from a provision that's been in the tax code since 2017. Many business owners with reactive CPAs are leaving this on the table because their returns aren't optimized or their entity structure isn't right.

Now multiply that over 3–5 years. With the deduction's extension or permanence, it compounds. A business owner missing this deduction for five years doesn't just miss one year's savings, they lose the compounding opportunity of capital that could have stayed in the business.

What You Need to Maximize It

The QBI deduction doesn't work automatically. You have to be positioned for it.

Clean books are non-negotiable. The deduction is based on qualified business income, which means your books need to correctly separate personal vs. business expenses, properly categorize income, and accurately reflect the entity's activity. Sloppy books produce inflated income and missed deductions.

The right entity structure matters. For S-Corp owners, the salary you pay yourself affects the calculation. Too high a salary reduces your QBI (wages paid to the owner-employee don't qualify). Too low a salary triggers IRS scrutiny on reasonable compensation. There's a zone, and finding it requires analysis, not guessing.

W-2 wages and qualified business property affect the ceiling above the income thresholds. Above the phase-in range, the deduction is limited to the greater of:

• 50% of W-2 wages paid by the business, or

• 25% of W-2 wages + 2.5% of the unadjusted basis of qualified property

Businesses with employees and significant equipment can often capture more. Businesses with no employees face a harder ceiling at higher income levels.

SSTB owners need proactive planning. If you're in a specified service business, your CPA should actively be helping you manage income to maximize QBI capture. This might include retirement contributions, entity restructuring, income timing strategies, or separating qualifying business activities from the SSTB.

What the Extension Means for Your Planning

Before the OBBBA, business owners with multi-year planning horizons had to account for the deduction disappearing after 2025. That sunset is no longer expected.

This changes several calculations:

• Entity structure decisions now have a longer time horizon to optimize around QBI, making the analysis worth doing carefully rather than treating it as a short-term play

• Income timing strategies that were rushed ahead of a 2026 expiration may need to be revisited

• Pass-through structures that looked less attractive without QBI may now be more valuable, especially compared to C-Corp alternatives

The deduction is now permanent. That means it's worth structuring your business around it, not just capturing it opportunistically year to year.

The Bottom Line

The QBI deduction is one of the most valuable provisions in the tax code for pass-through business owners. It requires nothing exotic to claim, just the right structure, clean books, and a CPA who's paying attention year-round.

If you're not sure whether you're getting it, or if your returns show you've been missing it, that's the conversation to have before you file another year.

Schedule a Free Financial Assessment

We'll look at your structure, your income, and whether you're capturing everything you're entitled to.

Simon Hase is a Tax Planning CPA and Growth CFO and founder of Kaufmann Advisors. Kaufmann Advisors works with established business owners on year-round tax strategy and financial clarity.