Note: With single-party control in Washington D. C. next year, it's more likely Congress could extend all or parts of the TCJA instead of allowing it to expire in 2026. Consult with a CLA tax advisor to understand how future tax proposals from the new Congress could impact you. We're here to help.
Key insights
- One of the most significant tax benefits for privately held businesses — the qualified business income (QBI) deduction — is scheduled to expire soon if Congress doesn’t extend it.
- Losing the QBI deduction could increase your marginal tax rate from 29.6% to 39.6% — a major jump.
- Consider strategies like reevaluating your business tax structure and accelerating income and deferring deductions to reduce the impact.
Start preparing now to mitigate the loss of the QBI deduction.
Many business and individual tax benefits are set to expire soon, including one of the most significant for privately held businesses, the qualified business income (QBI) deduction.
Along with planned tax rate changes, losing the QBI deduction could increase the marginal federal income tax rate on your business income from 29.6% to 39.6% — a major jump.
Explore what your business should know about this upcoming change and steps to take now to prepare.
What is the QBI deduction?
The Tax Cuts and Jobs Act (TCJA) was a major tax reform law passed in 2017. It reduced tax rates for individuals and businesses, increased the standard deduction, and created the QBI deduction. Many of these provisions will expire at the end of 2025, reverting to pre-TCJA rules unless Congress extends them.
The QBI deduction, also known as the Section 199A deduction, allows eligible business owners to deduct up to 20% of their qualified business income. The deduction is available to owners of pass-through entities such as sole proprietorships, partnerships, S corporations, and some trusts and estates.
The QBI deduction was part of Congress's effort to reduce taxes for businesses and their owners, similar to the substantially reduced corporate tax rate. While the corporate rate reduction was made permanent, the QBI deduction is set to expire at the end of 2025.
What the QBI deduction expiration would cost a business owner
Let's consider Jane, a business owner who has $1 million in QBI.
| Year | 2024 | 2026 (post-sunset) |
|---|---|---|
| Qualified business income (QBI) | $1 million | $1 million |
| QBI deduction (20% of QBI) | $200,000 | $0 |
| Taxable business income | $800,000 | $1 million |
| Federal income tax rate on business income | 37% | 39.6% |
| Federal income tax liability on business income | $296,000 | $396,000 |
The combination of the expiration of the 20% business income deduction and the increase in the top federal income tax rates from 37% to 39.6% causes Jane’s effective tax rate on business income to jump from 29.6% to 39.6% and increases Jane’s tax bill by $100,000 compared to 2024. (This a simple example not accounting for many other tax provisions including others changing or expiring as part of the sunset.)
Without the QBI deduction, you will need to reassess your tax planning strategies to mitigate the impact of higher taxes. It's like losing a key ingredient in your favorite recipe — you'll need to find a new way to make it work.
How to prepare for the QBI deduction expiration
Here are some steps to prepare for potential tax law changes:
Consult a tax professional
Seek advice from a tax professional who can help you understand the specific impact of the TCJA sunset on your business and develop strategies to reduce your tax liability.
Prepare to make changes
Take proactive steps to manage potential tax increases by starting your planning now. Stay in regular contact with your tax advisor to prepare. Consider strategies to accelerate income and defer deductions to take advantage of lower tax rates in 2024 and 2025. Explore other tax savings opportunities and strategic business changes to better prepare for potential future tax increases.
Review your business tax structure
Consider whether your current business structure is still the most tax-efficient option. In some cases, restructuring your business might provide tax benefits under the post-TCJA tax code.
What Congress may do regarding QBI
The future of the QBI deduction is not set in stone. Congress has the power to extend, modify, or even make permanent TCJA provisions, including the QBI deduction.
The 2024 election will play a significant role in determining the future of the QBI deduction. The Congressional Budget Office has estimated a 10-year extension of the TCJA would cost over $600 billion.
While it’s too early to predict election results and even more difficult to know what actions Congress will take, staying informed and engaged with your tax advisor can help you prepare.
How CLA can help with QBI deduction changes
At CLA, we can help cut through the confusion and provide you with knowledge and strategies to prepare for potential tax changes. Our team is ready to help you navigate these changes and develop custom approaches to help your business remain financially healthy and resilient.
Contact us
Start preparing now to mitigate the loss of the QBI deduction. Complete the form below to connect with CLA.
If you are unable to see the form below, please complete your submission here.