Category: Pass-Through Deduction

QUESTION

What is the pass-through income deduction for businesses?

ANSWER

This deduction was set to expire at the end of 2025, but it was extended by the One Big Beautiful Bill Act (OBBBA). Owners of some pass-through businesses can continue to claim a deduction of up to 20% of qualified business income, plus 20% of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income.

The deduction phases out at $403,500—$553,500 (joint filers), $201,750–$276,750 (single filers), and $201,775— $276,775 (married filing separately—not including the qualified business income deduction. Above these thresholds, the deduction is based on whether you’re a specified service trade business (SSTB).

Sarah, a florist in upstate New York, runs her boutique shop as a sole proprietorship. In 2025, her business nets $150,000 in qualified business income after expenses. Thanks to the Section 199A deduction— often called the pass-through deduction—she can deduct up to 20% of that income from her taxable amount, potentially saving her $9,000 in federal taxes, assuming she’s in the 22% bracket.

This deduction, made permanent under the One Big Beautiful Bill Act (OBBBA), benefits pass-through entities like LLCs, S corps, and partnerships, where income “passes through” to owners’ personal tax returns. In 2026, for Sarah, eligibility hinges on her business type and income level—under $201,750, with phase-outs above that. She must also ensure her income qualifies, excluding wages or investment returns.

By consulting a tax advisor, Sarah structures her finances to maximize deductions and reinvests savings into inventory. This scenario highlights how small businesses, like Sarah’s, can leverage such incentives to fuel growth, though rules may evolve—always verify with IRS guidelines and your tax professional for the latest updates.

_{Client Profile is based on a hypothetical situation. The solutions discussed may or may not be appropriate for you.}