The federal qualified business income deduction under Section 199A is no longer scheduled to expire after 2025. The One Big Beautiful Bill Act (OBBBA) made the deduction permanent for federal tax purposes. The changes apply to tax years beginning after December 31, 2025.

That is a meaningful change in planning horizon. It is not a promise of a particular tax result. The QBI deduction is a deduction, not a credit. The amount depends on the business, the owner's taxable income, filing status, and the statutory limits.

What The OBBBA Changed

For eligible taxpayers, the basic federal deduction remains up to 20% of qualified business income (QBI). The calculation also can include qualified REIT dividends and qualified publicly traded partnership income. The deduction is generally taken after adjusted gross income is calculated. It cannot exceed the applicable percentage of taxable income reduced by net capital gain.

The OBBBA also added a minimum deduction for an active trade or business. Beginning in 2026, an owner with at least $1,000 of QBI from an active trade or business may qualify for a minimum $400 deduction, subject to the statutory requirements and future inflation adjustments. This is a floor for qualifying taxpayers. It is not a replacement for the normal QBI calculation.

What Counts As Qualified Business Income

QBI is generally the net income, gain, deduction, and loss connected with a qualified trade or business conducted in the United States. It is calculated at the owner level. The business's revenue is not the same thing as the owner's QBI.

QBI generally does not include wages earned as an employee, capital gains, dividends, most investment interest, or income that is not effectively connected with a U.S. trade or business. It also excludes reasonable compensation paid by an S corporation and guaranteed payments to a partner for services. Business expenses, losses, and other items must be accounted for before applying the percentage.

Income Limits Still Matter

The deduction remains subject to income-based rules. For 2026, the Section 199A threshold is $403,500 for married taxpayers filing jointly and $201,750 for most other filing statuses, before the QBI deduction. The phase-in range is $150,000 for joint filers and $75,000 for most other filers. These amounts are indexed and can change in later years.

Above the threshold, a non-service business may face a limit tied to W-2 wages paid and the unadjusted basis of qualified property. A specified service trade or business (SSTB), such as many professional, health, legal, accounting, consulting, and financial-service businesses, is subject to additional limits as taxable income moves through the phase-in range. Above the applicable range, an SSTB generally does not qualify for the deduction.

That is why a headline percentage is not enough. Two owners with the same business income can have different deductions because their filing status, taxable income, wages, property, and business classification differ.

Federal And California Treatment Differ

California does not conform to the federal Section 199A deduction. An owner may receive a federal deduction while computing California taxable income without that deduction. Prepare federal and California estimates separately. Do not copy a federal QBI result onto the California return.

Practical Planning For 2026

The permanence of Section 199A makes multi-year planning more useful. It does not remove the need to run the numbers. Review the business's expected QBI, owner compensation, W-2 wages, qualified property, retirement contributions, and filing status. Also check whether the business is an SSTB and whether losses or other income will change taxable income.

Keep records that tie the owner's result to the business's books and the allocation of income, wages, and property. If the business is an S corporation or partnership, review compensation and allocation decisions before year-end. Do not treat them as a last-minute deduction exercise.

If you would like a second set of eyes on a 2026 estimate, LaviCPA can help you compare the federal Section 199A calculation with the California treatment and identify the assumptions that drive the result.