Section 199A: Plan for the 2025 QBI Deduction Sunset

A temporary tax break that millions of small business owners rely on is set to expire at the end of next year, putting new pressure on Congress and taxpayers alike. The Section 199A deduction—also called the Qualified Business Income (QBI) deduction—remains in effect for the 2025 filing season, but it’s scheduled to sunset on December 31, 2025, for taxable years starting January 1, 2026, unless lawmakers extend it.

Enacted in late 2017 under President Trump as part of the Tax Cuts and Jobs Act, the deduction allows eligible non‑corporate taxpayers in the United States 🇺🇸 to deduct up to 20% of qualified business income, plus up to 20% of qualified REIT dividends and publicly traded partnership income. The deduction applies broadly to pass‑through businesses, is claimed on individual returns, and has helped many immigrant and first‑generation entrepreneurs keep more cash in their firms for hiring and growth.

How the deduction works — core rules

On the surface the rules are straightforward: subject to limits, a taxpayer other than a corporation may deduct 20% of QBI, plus 20% of aggregate qualified REIT dividends and qualified PTP income.

Key limits and boundaries:
– The deduction is capped at 20% of taxable income (before the QBI deduction), reduced by net capital gain.
– It cannot be claimed by C corporations or on wages earned as an employee.
– S corporations and partnerships (other than a PTP) do not take the deduction themselves; instead they pass information to owners on Schedule K‑1, and each owner computes the QBI deduction on their own return.

Forms commonly used:
– Individual filers claim the deduction on Form 1040.
– Certain trusts and estates use Form 1041.
– Calculation is usually reported on Form 8995 or Form 8995‑A depending on income/complexity.
– Official IRS guidance: Qualified Business Income Deduction FAQs.

Policy status and outlook

The Section 199A deduction applies to taxable years beginning after December 31, 2017 and before January 1, 2026—the sunset was built into the law. As of September 2025, Congress had not passed an extension. The White House under President Biden had not announced a final position, and competing proposals on Capitol Hill range from making the QBI deduction permanent to reshaping it for higher earners.

• According to analysis by VisaVerge.com, the uncertainty complicates planning for family‑run firms, including many owned by immigrants who often operate as pass‑through entities rather than C corporations.
• If lawmakers act late in 2025, that could alter the outlook for the 2026 tax year.

Who is eligible

Eligibility is broad but not universal. Generally eligible:
– Individuals (including sole proprietors),
– Certain trusts and estates with QBI from pass‑through businesses,
– Pass‑through business types: sole proprietorships, partnerships, and S corporations.

Important points:
– The deduction is available whether you itemize or take the standard deduction.
– It does not require “material participation”; passive owners can qualify, subject to the statutory limits.

Income thresholds, SSTBs, and phase‑outs

The rules tighten as taxable income rises. For 2024 (most recently published thresholds):
– SSTB and wage/property limits do not apply if taxable income ≤ $383,900 (married filing jointly) and ≤ $191,950 (all other filers).
– Above those levels the deduction phases in until fully subject at $483,900 (MFJ) and $241,950 (others).

Note: The IRS is expected to adjust these thresholds for inflation for 2025; official 2025 figures were not final at the time of this report.

Three features that typically determine the deduction amount

These factors usually decide whether a taxpayer receives the full QBI deduction, a reduced amount, or nothing:

1. Specified Service Trade or Business (SSTB) limitation
   • Certain service fields—health, law, accounting, consulting, financial services, brokerage—face phase‑outs or elimination of the deduction when taxable income exceeds the thresholds.
   • Important: SSTBs can receive the full QBI deduction at lower taxable income; they don’t automatically lose it.
2. W‑2 wage and property basis limitation
   • For taxpayers above the thresholds, the QBI deduction is limited to the greater of:
     1. 50% of W‑2 wages paid by the business, or
     2. 25% of W‑2 wages + 2.5% of the unadjusted basis immediately after acquisition (UBIA) of qualified property.
   • This affects sole proprietors and partnerships with few/no employees; the 50% wage test can shrink the deduction to zero unless UBIA provides support.
3. Overall income cap
   • The deduction can’t exceed 20% of taxable income (before the QBI deduction), minus net capital gain.
   • High capital gains (for example, from REITs or PTPs) can reduce or eliminate the QBI deduction.

Reporting and accuracy for S corp & partnership owners

S corporations and partnerships are not the taxpayers for QBI calculation; they must report required items on Schedule K‑1 so owners can compute their deductions.

• If Section 199A information is missing on the K‑1, the law presumes the amount is $0. Owners should request a corrected K‑1 if items are omitted.
• IRS Schedule K‑1 resources include Schedule K‑1 (Form 1065).

Community and economic impact

Community observations:
– Immigrant‑owned groceries, home‑care agencies, trucking firms, and neighborhood restaurants report that the QBI deduction helps them reinvest profits into equipment, rent, and payroll.
– If the provision sunsets, many owners may face higher taxable income in 2026, which could affect hiring plans and the ability to absorb rising costs.

Policy debate highlights:
– Supporters argue the TCJA permanently lowered the C‑corporate rate to 21%, and the temporary QBI deduction offset that for pass‑through owners—ending it would disadvantage small and mid‑sized firms.
– Critics argue the deduction is complex, disproportionately benefits higher earners, and creates sharp cliffs—especially for SSTBs—suggesting alternatives like a simple rate cut or a small‑business credit might be preferable.

Practical steps for taxpayers (2025 filing season)

To prepare with the sunset looming, consider these actions:

• Confirm that pass‑through entities complete and correct K‑1s with Section 199A items. Missing detail can mean a lost deduction until fixed.
• Review projected taxable income for 2025 to see where you fall relative to thresholds. If you’re within or near phase‑out ranges, model SSTB and wage/UBIA limits before year‑end.
• Coordinate owner compensation and W‑2 wages where possible. Wage‑based limits matter only above thresholds, but compensation decisions affect the outcome.
• If you hold qualified property, verify UBIA figures and place‑in‑service dates. UBIA is determined immediately after acquisition and can support deductions for capital‑heavy firms with few employees.
• Watch for IRS inflation updates and late‑year legislation; a last‑minute extension could change 2026 planning.

Forms and calculation reminders

• Individuals: Form 1040
• Trusts/estates: Form 1041
• Computation: Form 8995 or Form 8995‑A for complex cases

Remember: the law caps the combined amount (20% of QBI + 20% of REIT dividends/PTP income) at 20% of taxable income (before the QBI deduction), minus net capital gain.

Important clarifications and limitations

• There are no special rules for material participation—active and passive owners can qualify, subject to limits.
• The deduction does not change self‑employment tax or payroll tax; it’s an income tax deduction only.
• It is not available to C corporations, and does not apply to employee wages.
• QBI losses do not create an immediate deduction—they carry over and can offset future QBI.
• There is no double counting across entities: each activity’s QBI, wages, and UBIA must be tracked and combined following the statute’s ordering rules.

The clock is ticking. The QBI deduction helped many pass‑through owners partly mirror corporate rate relief under the TCJA, but it was never permanent. With the current law expiring for taxable years beginning in 2026, owners have one more full year to plan with certainty.

Final recommendations

• Compute the QBI deduction carefully for the 2025 tax year and prepare for a 2026 tax year without it—unless Congress acts.
• Keep records tidy, track wage and property data, and model any proposed changes before making year‑end moves.
• If an extension passes late in 2025, it may apply to the 2026 tax year; if not, the deduction will end as scheduled.

Prudent planning—rather than rushed reactions—will help avoid costly mistakes when the overall cap ties the deduction to the taxpayer’s final taxable income figure.