The United States 🇺🇸 has moved to make the Qualified Business Income (QBI) deduction permanent and easier to claim for many small business owners, including immigrant entrepreneurs running pass-through businesses such as sole proprietorships, partnerships, and S corporations. As of September 7, 2025, provisions tied to the 2025 One Big Beautiful Bill Act preserve the core 20% QBI deduction, widen the range where the wage and property limit phases in, and add a small minimum deduction for active owners.
These changes matter most for taxpayers whose taxable income sits near the threshold where the wage and property (W-2 UBIA) test can reduce the deduction. Under the new rules, the same basic math still applies—the 20% deduction remains subject to the W-2 UBIA limitation and, where income is over the threshold, a phased-in reduction applies—but the broadened phase-in range softens the bite. For business owners who plan cash flow, hiring, and equipment purchases around tax season, the new phase-in range creates a longer runway before the full limitation kicks in.
How the phased-in reduction works
The law keeps the original structure for calculating the reduction:
- Start with 20% of QBI.
- Compute the W-2 UBIA limitation (the greater of two tests—see details below).
- If 20% of QBI exceeds the W-2 UBIA limit, the excess is subject to a phased-in reduction.
- The phase-in reduction equals the excess amount multiplied by the phase-in percentage.
- The phase-in percentage = (taxable income above the threshold) ÷ (phase-in range).
- If the phase-in percentage reaches 100%, the entire excess is disallowed.
Policy goal: continue to grant the QBI deduction while scaling it down smoothly as incomes climb, rather than imposing a sharp cutoff that surprises taxpayers who cross the line by a small amount.
Numerical example (original vs. updated phase-in range)
The example commonly used by tax professionals illustrates the impact clearly.
Facts:
– Single filer, sole proprietorship manufacturing widgets
– QBI = $70,000
– W-2 wages paid = $20,000
– UBIA (machine placed in service) = $100,000
– Taxpayer’s taxable income = $30,000 above the threshold
Step-by-step:
– 20% of QBI = $14,000
– W-2 UBIA limitation = greater of:
– 50% of W-2 wages = $10,000, or
– 25% of W-2 wages + 2.5% of UBIA = $7,500
– Limitation = $10,000, so excess amount = $4,000 ($14,000 − $10,000)
Old phase-in range (single): $50,000
– Phase-in percentage = $30,000 ÷ $50,000 = 60%
– Phased-in reduction = $4,000 × 60% = $2,400
– Final QBI component = $14,000 − $2,400 = $11,600
New phase-in range (single): $75,000 (indexed)
– Phase-in percentage = $30,000 ÷ $75,000 = 40%
– Phased-in reduction = $4,000 × 40% = $1,600
– Final QBI component = $14,000 − $1,600 = $12,400
Result: the larger phase-in range reduces the haircut, leaving more deduction and helping cash flow for payroll, inventory, or equipment upkeep.
Key components to remember
- Qualified Business Income (QBI): Generally the net profit from the business, excluding investment income like capital gains.
- Taxable income: Overall taxable income after above-the-line deductions and itemized or standard deductions.
- W-2 UBIA limitation: The greater of:
- 50% of W-2 wages, or
- 25% of W-2 wages + 2.5% of UBIA (unadjusted basis in qualified property)
When taxable income is below the threshold, owners typically take the full 20% of QBI (subject to the overall taxable income cap). When it rises above the threshold, the wage and property test begins to limit the deduction and the phased-in reduction formula applies.
Practical implications and examples for business owners
- The widened phase-in range means smaller reductions during the phase-in, benefiting owners with variable income or late-year spikes.
- The new minimum deduction (currently $400, indexed) ensures active owners with at least $1,000 of QBI receive at least a small deduction even when wages or property are low.
- Common small business types affected: restaurants, trucking companies, retail shops, trade contractors, small manufacturers, tech service start-ups—many of which are immigrant-owned pass-throughs.
Example scenarios:
– A contractor whose income bounces around the threshold will now see lower phase-in percentages for modest income increases, reducing unexpected cuts to the deduction.
– Buying equipment before year-end can increase UBIA and raise the W-2 UBIA limitation, narrowing the excess and preserving more of the QBI deduction.
– Adding a December hire might reduce phase-in impact and help payroll cash flow when the business is near the threshold.
Special rules and ongoing complexities
- Specified Service Trades or Businesses (SSTBs) (health, law, accounting, consulting, etc.) still face separate phase-out rules and can lose the deduction at high incomes. Proposals exist to ease those caps, but nothing has changed yet.
- Determining which wages count as W-2 wages and computing UBIA correctly can be time-consuming and technical:
- UBIA is the unadjusted basis immediately after acquisition, not the depreciated value.
- Property placed in service late in the year still counts for UBIA in the same way.
- Owners who rent property to their own business must ensure the rental activity qualifies as a trade-or-business and that wages/UBIA are properly allocated.
Practical steps tax professionals recommend
- Track taxable income monthly in the last quarter. If you’re edging into the phase-in range, estimate the phase-in percentage and excess amount.
- Review W-2 wages paid by the business. Confirm that payroll documents are complete and all eligible wages are counted.
- Confirm UBIA for property placed in service this year. Keep invoices and service dates; UBIA depends on cost basis and place-in-service date.
- Consider timing purchases: assets placed in service before year-end can increase UBIA and help the W-2 UBIA limit.
- For partnerships and S corporations, align owner compensation and guaranteed payments with projected QBI and taxable income to avoid surprises.
Recordkeeping and IRS guidance
- Documentation is essential: keep payroll reports, Forms W-2 and W-3, acquisition documents for equipment, and dates assets were placed in service.
- Partnerships and S corp owners should review Schedule K-1 allocations to ensure QBI, wages, and UBIA are properly reported.
- Officials and practitioners expect further IRS guidance. For official materials, see the IRS page on Section 199A:
Interactions with broader tax planning
- Because taxable income drives the phase-in percentage, ordinary decisions—like retirement plan contributions, timing business expenses, or income recognition—affect where you land in the phase-in range.
- Small timing moves (accelerating expenses into December, delaying invoicing a few days) can shift the final deduction for owners near the threshold.
- Raising wages solely to increase the limitation usually isn’t justified by tax savings alone—wages have payroll tax and long-term cost implications. Hire for operational needs, then check tax effects.
Carryovers and permanence
- Negative QBI reduces the deduction and can carry over to future years. The permanence of the QBI deduction ensures such carryovers remain relevant beyond 2025.
- The permanency and broader phase-in thresholds reduce planning uncertainty and year-to-year swings that used to surprise business owners.
Quick recap — arithmetic checklist
- Start with 20% of QBI.
- Compute the W-2 UBIA limitation: greater of 50% of W-2 wages, or 25% of W-2 wages + 2.5% of UBIA.
- If 20% of QBI > W-2 UBIA limit, the difference is the excess amount.
- Phase-in percentage = (taxable income above threshold) ÷ (phase-in range).
- Phased-in reduction = excess amount × phase-in percentage.
- Subtract the phased-in reduction from 20% of QBI to get the QBI component.
Final takeaways
- The QBI deduction is now permanent, and the expanded phase-in range lessens the chance that a modest income uptick drastically reduces the benefit.
- The minimum deduction provides a small backstop for active owners with modest profits.
- For immigrant entrepreneurs and small pass-through businesses, the changes improve predictability and can preserve funds for hiring, equipment, and operations.
- Work through the math early, keep clean payroll and acquisition records, and consult your tax advisor to apply the rules correctly as IRS guidance is updated.
This Article in a Nutshell
Effective September 7, 2025, the QBI deduction is now permanent and retains the core 20% benefit for eligible pass-through owners. The law broadens the phase-in range for the W-2 UBIA limitation, which reduces how sharply the deduction is decreased for taxpayers with income near the threshold. Calculations still follow the original formula: 20% of QBI compared to the greater of 50% of W-2 wages or 25% of wages plus 2.5% of UBIA; any excess is multiplied by a phase-in percentage determined by taxable income above the threshold divided by the phase-in range. A new indexed minimum deduction (around $400) ensures smaller active owners with ≥ $1,000 QBI receive some benefit. Practical effects include better predictability, smaller deductions lost from modest income spikes, and planning opportunities—such as timing equipment purchases or hires to increase UBIA or wages. SSTB limitations and technical determinations of wages and UBIA remain complex; taxpayers should track income, maintain payroll and acquisition records, and consult tax advisors while watching for IRS guidance on Section 199A.
