In a 2024 National Association of Manufacturers (NAM) survey, 93% of respondents who operate as pass-through entities stated that the impending expiration of the Section 199A qualified business income (QBI) deduction would negatively impact their ability to grow, create jobs and invest in their businesses. The One Big Beautiful Bill Act (OBBBA) nullifies those concerns.

The new law makes the QBI deduction permanent. (It had been scheduled to expire Dec. 31, 2025.) The OBBBA also broadens the phase-in ranges on the deduction's income-based limits, meaning many manufacturers will qualify for a larger deduction.

QBI basics

The QBI deduction for sole proprietors and owners of pass-through entities (partnerships, S corporations and, typically, limited liability companies) was created by the Tax Cuts and Jobs Act (TCJA). According to NAM, the deduction has freed up significant capital for smaller manufacturers to reinvest in their businesses through equipment purchases, research and development, and hiring.

QBI is defined as the net amount of income, gains, deductions and losses, excluding reasonable compensation, certain investment items and payments to partners for services rendered. Qualified taxpayers can deduct as much as 20% of their QBI. The deduction is available regardless of whether you itemize deductions, and it also applies for alternative minimum tax purposes.

Income-based limits

Bear in mind that the deduction is subject to limits. First, it can't exceed 20% of your taxable income. Second, if your taxable income exceeds a threshold amount, a wage and investment limit begins to phase in. This means that your QBI deduction is partially or fully reduced to the greater of your share of:

  • 50% of your business's W-2 wages, or
  • 25% of W-2 wages plus 2.5% of the unadjusted basis immediately after acquisition (UBIA) of qualified business property.


In partnerships and S corporations, each partner or shareholder is treated as having paid W-2 wages for the tax year in an amount equal to his or her allocable share of the W-2 wages the business paid during that tax year. The UBIA of qualified property generally is the purchase price of tangible depreciable property that the business holds at the end of the tax year, including machinery, equipment and real estate used in the business.

The TCJA phased in the application of the wage and investment limit for individuals with taxable income that exceeds the threshold amount — over the next $50,000 of taxable income ($100,000 of taxable income for married couples filing jointly). The threshold amount is adjusted annually for inflation.

When taxable income exceeds the phase-in range, the limit is phased in completely, so the deduction is limited to the greater of 50% of the wages or 25% of the wages plus 2.5% of the UBIA. For 2025, the phase-in range is $197,300 to $247,300 ($394,600 to $494,600 for joint filers).

The OBBBA effect

In addition to making the QBI deduction permanent, the OBBBA increases the size of the phase-in range from $50,000 to $75,000 ($100,000 to $150,000 for joint filers) beginning in 2026. So, for 2026, the phase-in range (before factoring in the annual inflation adjustment to the threshold) will be $197,300 to $272,300 of taxable income ($394,600 to $544,600 for joint filers). As a result, owners of pass-through manufacturing companies that are subject to the wage and investment limit might qualify for larger deductions than they were previously allowed.

Also beginning in 2026, the OBBBA establishes an inflation-adjusted minimum QBI deduction of $400 for taxpayers with at least $1,000 of QBI from one or more active businesses in which they materially participate. "Material participation" generally requires regular, continuous and substantial involvement by the taxpayer in business operations. Both the minimum deduction amount and the QBI threshold will be adjusted annually for inflation.

Plan ahead

If your taxable income is near the phase-in threshold, you can take steps to keep it below the threshold, such as maximizing retirement contributions. Should your income exceed the phase-in range, you can boost your deductions by shifting work to employees from contractors and thus increasing W-2 wages. We can help you navigate these and other strategies to minimize your tax bill.