Understanding Qualified Business Loss Carryovers Under Section 199A

The United States 🇺🇸 has locked in a major tax policy shift affecting small business owners, independent contractors, and other pass-through filers, with lawmakers keeping the qualified business income deduction under IRS Section 199A QBI Deduction and fine-tuning how a net loss is handled across years. As of September 7, 2025, the core rule remains: when a taxpayer’s combined QBI across all qualified trades or businesses ends the year in a loss, that year’s amount becomes a qualified business loss and is carried forward.

In the next taxable year, that carryover is treated as a loss from a qualified trade or business and reduces any positive QBI before the deduction is calculated. This loss carryover continues forward, year after year, until there is a taxable year with net positive QBI. Policymakers preserved that mechanism while moving to expand access and increase the deduction rate in future years, a development tax advisers say will matter for families whose income rises and falls with the seasons, contracts, or market cycles.

Key statutory changes and timing

• The 2025 “One Big Beautiful Bill Act” (OBBBA) keeps the QBI deduction in place beyond 2025 and raises the deduction rate from 20% to 23% for taxable years beginning after December 31, 2025.
• The qualified business loss carryover rule itself remains the same: losses are carried forward and reduce future positive QBI before the deduction is applied.
• Because the deduction rate increases to 23%, prior-year losses that reduce future QBI will now affect a larger deduction amount once QBI turns positive.

Phase-in thresholds, minimum deduction, and indexing

Congress adjusted income ranges that trigger limits tied to wages, qualified property, and specified service trade or business (SSTB) status. Starting in 2026, phase-in thresholds are increased and indexed:

• Joint filers: from $100,000 to $150,000
• Other filers: from $50,000 to $75,000

Lawmakers also approved a new minimum deduction of $400 (indexed) for taxpayers who have at least $1,000 of total QBI from an active qualified trade or business beginning in 2026. This floor may matter after lean years when modest income returns.

Interaction with adjusted taxable income rules

A separate tax change made permanent the add-back of depreciation, amortization, and depletion in computing adjusted taxable income, effective retroactively to the start of 2025. While this rule primarily targets interest deduction limits, it can indirectly affect overall taxable income calculations that interact with Section 199A thresholds.

• For taxpayers with a qualified business loss carryover, changes to adjusted taxable income can shape how quickly loss amounts are absorbed.
• That, in turn, affects how much of the higher 23% deduction applies once QBI turns positive.

How the qualified business loss carryover works (policy overview)

The essentials of the qualified business loss carryover are straightforward:

1. If the net amount of QBI from all qualified trades or businesses for a taxable year is negative, the taxpayer records a qualified business loss.
2. That loss is carried forward to the next year and first reduces any positive QBI in that year before calculating the deduction.
3. Any remaining carryover continues to be applied in subsequent years until a year arrives with net positive QBI.
4. The carryover does not expire with time; it keeps rolling forward until absorbed.

This rule smooths swings in business income so the Section 199A deduction reflects multi-year results rather than one volatile year.

Legislative context and pending proposals

• OBBBA’s permanence means Section 199A will not sunset after 2025, removing planning uncertainty for sole proprietorships, S corporations, and partnerships.
• The 23% rate applies to QBI, qualified REIT dividends, and publicly traded partnership income for taxable years beginning after December 31, 2025.
• The House Ways and Means Committee has floated a proposal to replace the complete phase-out for higher-income taxpayers with a flat percentage phase-out. That proposal remained under consideration as of mid-2025 and is not in effect. If enacted, it could expand eligibility for some filers, including certain SSTBs.

Practical impact on taxpayers and planning tips

For families and small businesses with irregular earnings—contract designers, rideshare drivers with part-time LLCs, local shop owners, construction trades—the carryover is a practical safety net. A year with a net QBI loss reduces future positive QBI, lowering the deduction in that later year while preserving recognition of the loss over time.

Example:
– A filer had a $30,000 qualified business loss in 2025 and earns $40,000 of positive QBI in 2026.
– The 2025 loss reduces the 2026 amount dollar for dollar, leaving $10,000 of QBI for the deduction.
– If the filer remains under the expanded 2026 thresholds, the deduction applies to that $10,000, and any remaining loss continues to carry forward.

Practical steps tax professionals recommend:
– Track your qualified business loss carryover in a clear schedule and confirm it reduces QBI before applying the deduction.
– Monitor inflation adjustments to the $150,000 and $75,000 ranges after 2026, which can change eligibility.
– If you operate an SSTB, follow legislative activity that could alter phase-out structure.
– For 2026 and beyond, note the $400 minimum deduction for at least $1,000 of active QBI—this floor can matter after a loss year.
– When planning equipment purchases and financing, recognize that permanent changes to adjusted taxable income computations can affect your position relative to Section 199A limits.

Where to get official guidance

The IRS maintains detailed instructions on how the deduction works, who qualifies, and how to treat losses. Official guidance is available at the IRS Qualified Business Income Deduction FAQs:
IRS Section 199A QBI Deduction

Taxpayers should use this resource to confirm definitions of QBI, which businesses qualify, and how SSTB rules apply. Because Section 199A interacts with other parts of the tax code, many filers will still benefit from professional advice.

Broader context and practical considerations

• Section 199A was introduced by the Tax Cuts and Jobs Act of 2017 to give non-corporate businesses a deduction tied to earnings, with guardrails to prevent abuse.
• From the start, the deduction faced debate: supporters called it a lifeline for pass-throughs, while critics warned about complexity and unequal results.
• The qualified business loss carryover has been one of the steadier parts of the regime—simple in concept but math-heavy in practice.

Stakeholders report mixed results across sectors:
– Owners of rental real estate, franchise operators, and independent professionals may benefit, though details vary.
– The widened phase-in thresholds can ease pressure on mid-income filers.
– Potential future changes to phase-out mechanics could expand access for certain high earners.

For taxpayers juggling multiple businesses, the netting rule is key: a strong year in one trade can be offset by a loss in another, producing a combined result that may reduce current-year deductions but create future potential once losses are absorbed. This is why meticulous tracking of each trade’s QBI and the overall qualified business loss carryover is essential.

Implementation timeline (summary)

• Qualified business loss carryover rule: already in place and unchanged.
• 23% deduction rate: begins for taxable years after 2025.
• Higher phase-in thresholds ($150,000 and $75,000) and $400 minimum deduction (for at least $1,000 QBI): start in 2026, then indexed for inflation.
• Permanent changes to adjusted taxable income computations (add-back of depreciation, amortization, depletion): apply starting 2025.

Some filers will see immediate effects in 2025 calculations tied to taxable income definitions, while the richer QBI deduction percentage takes effect the following year.

Important takeaway: The carryover does not erase the hardship of a bad year, but it ensures past losses are recognized when income returns. With Section 199A now permanent and a 23% rate on the horizon, the framework aims to be more predictable—though still intricate—so careful recordkeeping and professional advice remain crucial.