QBI Deduction 2026: Permanent 20% Break Meets Rising Owner Costs

A tax break that no longer expires

Owners of pass-through businesses are going into the 2026 tax year with a benefit they haven't had since 2018: they know the qualified business income (QBI) deduction will still be there. The deduction comes from Section 199A. It lets sole proprietors, partners, S corporation shareholders and most LLC owners subtract up to 20% of their qualified business income before federal income tax is calculated.2125 It was created by the 2017 Tax Cuts and Jobs Act and was due to expire after the 2025 tax year. The One Big Beautiful Bill Act, signed July 4, 2025, removed that expiration date.2429

The tax guides agree on the basic facts. The rate stays at 20%. A House-passed draft would have raised it to 23%, but the enacted law, Public Law 119-21 §70105, did not.2227 Congress made three structural changes instead. It made the deduction permanent, it widened the income range over which the deduction phases down, and it created a $400 minimum deduction for owners who actively work in a business with at least $1,000 of qualified income.2228

The dollar amounts can be meaningful. A sole proprietor with $120,000 of qualified income who stays under the threshold can deduct $24,000.27 Another worked example puts the deduction on $150,000 of qualified income at $30,000, which saves about $7,200 for someone in the 24% bracket.24 The deduction is not an itemized deduction, so owners can take it on top of the standard deduction.24

Where the 20% actually applies

The "up to 20%" wording matters. For 2026, the full deduction applies with few conditions below $201,750 of taxable income for single filers and $403,500 for joint filers.2324 Below those thresholds, it doesn't matter what kind of business the owner runs or whether it has employees. A dentist, a consultant and a dog walker all get the same 20%.25 The deduction is still capped at 20% of taxable income minus net capital gain.21

Above the threshold, limits kick in. The phase-in range is now $75,000 for single filers and $150,000 for joint filers, up from $50,000 and $100,000. The ranges top out at $276,750 and $553,500.2523 In that range and above it, the deduction is limited by the greater of 50% of the business's W-2 wages or 25% of wages plus 2.5% of the original cost basis of its qualified property.22 "Specified service" businesses, such as many professional practices, lose the deduction entirely once income passes the top of the range.25 One CPA firm also warns that Employee Retention Credit claims can reduce the W-2 wages counted toward the limit.22

The guides don't all agree on the numbers. Most use the inflation-adjusted 2026 thresholds from IRS Revenue Procedure 2025-32.24 At least one guide labeled for 2026 still lists $197,300 and $394,600, which are the 2025 figures.3023 That difference matters for owners close to the line. Anyone working through the phase-in math should check the threshold against IRS guidance rather than a secondhand summary.

The QBI change is part of a larger package. The same law raised the Section 179 expensing limit to $2.56 million for 2026 after inflation indexing, restored 100% bonus depreciation for property placed in service after January 19, 2025, and made domestic R&D costs immediately deductible again.27

The deduction lands in a weak small-business economy

The tax picture is settled, but the economy these businesses operate in is not. The NFIB Small Business Optimism Index fell 0.8 points in September to 97.9, just under its 52-year average of 98.0.2 That was the second straight monthly drop, after the index reached 99.8 in July, its highest reading in nearly a year.1 TD Economics noted that September's reading missed the consensus forecast of 98.2. The biggest drag was the share of owners expecting the economy to improve, which fell 4 points.3

The more telling numbers are about owners' own businesses. Only 7% said it was a good time to expand, down 5 points in a month.2 The share rating their business's health as "good" fell from 57% to 48%, and the share calling it only "fair" rose from 28% to 35%. NFIB research director Holly Wade called this a "significant deterioration" worth watching.4 NFIB's uncertainty index rose to 90, well above its historical average of 68.4

All the reporting puts costs at the center. Inflation was the top problem for 20% of owners in September, up 4 points from August and far above the 7% historical average.2 Wade linked much of that to energy prices. AAA figures cited in local coverage show gasoline at $4.34 a gallon and diesel at $6.28, up from $2.98 and $3.76 before the war with Iran began.4 A net 31% of owners raised average selling prices, and a net 31% plan more increases, both well above the historical norm of 14%.4 TD found that the share of firms raising prices this year is the highest since 2023.3

Taxes are lower on the list. In September, 11% of owners named taxes as their top problem, down 5 points from August and tied with poor sales for third place.2 In August, taxes had tied with inflation for second.1 A reasonable reading is that the permanent QBI deduction and expanded expensing have taken taxes off owners' list of urgent worries for now, while costs have moved up.

Minimum wage increases add to payroll costs

Labor remains the biggest pressure point. Labor quality or availability was the top problem for 26% of owners, the third month in a row it led the list.2 Among owners trying to hire, 87% reported few or no qualified applicants.2 Wade said construction firms are struggling to find electricians, plumbers and HVAC technicians, and are competing for them with companies building data centers and AI infrastructure, which can pay more.4

Wage floors will rise for many employers on January 1. Michigan goes from $13.73 to $15.00, the largest increase in the country for 2027. Rhode Island goes from $16 to $17, and Virginia from $12.77 to $13.75.12 Washington's rate rises to $17.73, and Seattle's to $22.14.1619 California, Connecticut, New Jersey, Colorado, Maine, Nebraska, Minnesota, Ohio, South Dakota and Montana also have scheduled increases.1720 About 20 states will stay at the federal $7.25.12

Sources differ slightly on the details. One payroll guide already lists Arizona at $15.65 for 2027.12 Another found no rate posted on the state's site as of October 21.20 Some local and small-employer carve-outs remain. New Jersey sets a slightly lower $16.25 rate for seasonal employers and those with fewer than six workers.20 Washington is keeping the overtime-exempt salary multiplier for firms with 50 or fewer employees at 2.25 times the minimum wage, while larger employers move to 2.5.16

This is where the QBI deduction interacts with payroll. Owners above the income threshold have their deduction limited by W-2 wages paid.22 Higher payroll can therefore increase the deduction for those owners, though it never fully offsets the cost of the wages. Most small owners fall below the threshold, so for them the wage increase is simply an added cost.

Borrowing costs and business credit cards

Financing is getting more expensive. A net 8% of NFIB owners said they paid a higher rate on their most recent loan, the highest share since June 2025. The average rate on short-term loans rose 0.7 points in a month to 8.2%.2 TD Economics reports that markets expect the Federal Reserve to tighten further in the coming months.3 NerdWallet attributes higher SBA loan rates to their link to the prime rate. Fixed-rate SBA 7(a) caps run from 12% to 15% depending on loan size.34

The cost gap between kinds of credit is large. The Kansas City Fed's first-quarter data show a median of 6.90% on new fixed-rate bank lines of credit.36 Online lenders charge 20% to 60% APR depending on the borrower's risk.35 An industry survey found that 60% of firms that borrowed from online lenders said the cost was higher than expected, compared with 31% at credit unions.38 More than 40% of small businesses use business credit cards, which often carry APRs of 20% to 30%.39 That is reasonable for small recurring expenses but expensive for financing working capital when costs are rising.

The bottom line

The permanent QBI deduction is a real benefit, and the certainty may matter as much as the dollars. Owners can now decide on entity structure, salaries and ownership changes without planning around an expiration date.2328 But the deduction is calculated on profit. Rising fuel, wage and borrowing costs reduce that profit before the deduction is applied. Our view is that the tax change works as a cushion, not a tailwind, for 2026. It keeps more of each dollar of profit with the owner, but it doesn't address the cost pressures behind the current drop in owner confidence. NFIB's October index, due November 10, will show whether that drop is continuing.1