The QBI Deduction Is Now Permanent: What Pass-Through Owners Should Revisit
The qualified business income deduction no longer has a scheduled expiration date. The 2025 federal tax law made it permanent and expanded parts of it beginning in 2026. If you own a pass-through business, that makes this a useful time to revisit your tax projection.
Permanent doesn't mean automatic. Your income, business activity, payroll, and ownership structure still affect whether you qualify and how much you can deduct.
What the deduction does
The qualified business income deduction, usually called QBI, generally lets eligible sole proprietors, partners, and S corporation owners deduct up to 20% of qualifying business income on their personal federal returns. Some rental businesses qualify too.
The deduction lowers taxable income. Here's a simplified example with $100,000 of QBI after the required adjustments. Assume the owner qualifies, is below the applicable income limits, and has enough taxable income after excluding net capital gain and qualified dividends to use the full deduction. For illustration, the entire deduction falls in a hypothetical 24% federal income tax bracket, and no other limits apply.
| Item | Illustrative amount |
|---|---|
| Qualified business income | $100,000 |
| QBI deduction at 20% | $20,000 |
| Assumed federal tax rate on that income | 24% |
| Federal income tax reduction | $20,000 × 24% = $4,800 |
The $20,000 deduction doesn't create a $20,000 refund. The actual tax savings depend on the full return. The QBI deduction also doesn't reduce self-employment tax or create a separate deduction on an Ohio individual return.
Your wages as an employee aren't QBI, including wages from your own S corporation. Capital gains and certain other income are excluded. Your overall taxable income can also limit the deduction.
Beginning in 2026, the income ranges over which certain limits take effect are wider: $150,000 for joint filers and $75,000 for other filing statuses. Eligible taxpayers whose combined QBI from all qualified businesses in which they materially participate is at least $1,000 can receive a minimum deduction of $400. This is a floor on the deduction, not an additional $400.
Income limits for service businesses
Businesses in fields such as health, law, accounting, and consulting are subject to special limits at higher incomes. For these businesses, the deduction gradually falls as taxable income moves through the applicable range and can disappear entirely.
The table uses taxable income before the QBI deduction, not gross revenue or the amount you take out of the business. Your spouse's income and other items on the return can affect the calculation.
| Filing status | No service-business reduction | Partial deduction may be available | No deduction from this service business |
|---|---|---|---|
| Married filing jointly | $403,500 or less | Over $403,500 but below $553,500 | $553,500 or more |
| Single and most other filers | $201,750 or less | Over $201,750 but below $276,750 | $276,750 or more |
| Married filing separately | $201,775 or less | Over $201,775 but below $276,775 | $276,775 or more |
Other requirements still apply below and within these ranges. Being halfway through a range doesn't necessarily mean you receive half the deduction.
A married dentist or consultant filing jointly with $500,000 of taxable income before the QBI deduction may therefore qualify for a partial deduction in 2026, assuming the other requirements are met. If an earlier projection showed no deduction, have it recalculated using the current rules.
Payroll and business property can affect the result
Other qualifying businesses don't face the same service-business phaseout, but higher-income owners can still run into limits tied to employee wages and qualifying depreciable property.
Those limits take effect gradually over the income range. A business with little payroll and few qualifying assets may produce a smaller deduction than its owner expects. Rental businesses can sometimes benefit from the property portion of the calculation.
Don't change your entity based on one deduction
The permanent deduction gives you a more stable starting point for comparing business structures. It doesn't make an S corporation, partnership, or C corporation the best choice for everyone.
C corporations pay federal income tax at the corporate level, and distributions can create another tax for shareholders. Pass-through owners generally report business income on their own returns. The comparison also depends on payroll taxes, state taxes, retirement plans, and how much cash stays in the business.
Compare the total cost over several years before reorganizing. A change that improves one line of the return can create costs elsewhere.
Reasonable compensation for S corporation owners
An S corporation must pay reasonable compensation for an owner's work before treating payments as distributions. Don't lower salary just to increase a deduction.
Salary reduces business profit, but it can also support the wage-based QBI limit at higher incomes. It affects payroll taxes and retirement contributions too. Set a supportable salary based on the work performed, then include the tax effects in the projection.
Check the Ohio result separately
The federal QBI deduction doesn't carry over as a separate deduction on an Ohio individual return. Ohio has its own business income deduction and tax rules, so review both returns when evaluating a planning idea.
Contact Schultz CPA, LLC if you haven't revisited QBI since the law changed. We can check the current deduction and whether your income projection, entity structure, and compensation still fit your business.
This article provides general information. Eligibility and limits depend on the tax year and your circumstances. Get advice before changing compensation or business structure.