There is a tax deduction available to millions of US small business owners that can reduce their effective tax rate by nearly eight percentage points. It has existed since 2018. It was just made permanent. And a significant portion of qualifying owners are either claiming it incorrectly, claiming less than they're entitled to, or not claiming it at all.
That's not speculation. It's a pattern that shows up consistently when business tax returns are reviewed with any rigor.
The deduction is the Qualified Business Income (QBI) deduction under Section 199A. If you operate as an S-corp, LLC, partnership, or sole proprietorship, this is one of the most valuable deductions you may be leaving on the table.
What the QBI Deduction Actually Does
Eligible pass-through business owners can deduct up to 20% of their qualified business income directly from taxable income on their personal return.
For a business owner in the 37% federal tax bracket, this can reduce the effective tax rate on business income to approximately 29.6%.
For someone in the 24% bracket, the effective rate drops to roughly 19.2%.
This is not a tax credit that reduces taxes dollar-for-dollar. It lowers the amount of income subject to tax, which can generate substantial long-term savings.
The OBBBA Made It Permanent and Expanded It for 2026
The Qualified Business Income deduction was originally scheduled to expire on December 31, 2025.
The One Big Beautiful Bill Act (OBBBA) removed that expiration date, making Section 199A a permanent part of the US tax code.
The legislation also expanded eligibility beginning in 2026.
New minimum deduction available to qualifying owners with at least $1,000 of QBI who materially participate in the business.
Higher income thresholds allow more business owners to qualify before deduction limitations begin.
Businesses can now build long-term tax strategies around Section 199A without worrying about expiration dates.
Owners who previously exceeded income thresholds may now qualify for at least a partial deduction.
For many taxpayers, eligibility extends until income reaches approximately $275,000 for single filers and $550,000 for joint filers.
The W-2 Wage Trap That Costs S-Corp Owners
One of the most overlooked aspects of the QBI deduction involves W-2 wages.
For higher-income taxpayers, the deduction becomes limited based on:
- 50% of W-2 wages paid by the business, or
- 25% of W-2 wages plus 2.5% of qualified property basis
This creates a challenge for S-corporation owners who intentionally minimize their salary to reduce payroll taxes.
A business owner taking large S-corp distributions while maintaining a very low W-2 salary may unintentionally reduce their QBI deduction. Payroll decisions made throughout the year directly affect the deduction available when the return is filed.
The ideal balance varies by business and income level.
Reducing payroll taxes and maximizing the QBI deduction are often competing goals, requiring careful planning rather than last-minute adjustments.
Who Should Review Their QBI Position Right Now
The 2026 changes make an immediate review worthwhile if any of the following apply:
- You operate an S-corp and intentionally keep your W-2 salary low
- You were previously told your income was too high to qualify
- You operate in a Specified Service Trade or Business (SSTB)
- You own multiple LLCs or pass-through businesses
- You have never formally evaluated your Section 199A eligibility
Business owners with multiple entities may benefit from aggregation strategies that increase eligible wage bases and deduction limits.
Others discover they qualify for deductions they were incorrectly told they could not claim.
The QBI deduction is real. It is permanent. And beginning in 2026, more business owners will qualify than did previously.
The only question is whether your current tax strategy is structured to capture its full value.