Big Win for Small Businesses: 20% Qualified Business Income (QBI) deduction made Permanent

By Tax&Facts | Published on Feb 4, 2025 | Read: 3 Mins

Small business owners and self-employed people have a reason to celebrate. The 20% pass-through business income deduction, which was set to expire in 2025, is now permanent thanks to the new OBBBA law. This is a major win for anyone running a small business or side hustle in the U.S.

What Is the 20% Deduction?

If you own a small business—like a sole proprietorship, partnership, or S corporation—you can deduct up to 20% of your business income when calculating your taxes. In simple terms, this means the government won’t tax you on a portion of the money your business earns, which can save you a significant amount of money each year.

Before this change, the deduction was set to expire, leaving many business owners uncertain about future tax bills. Now, with the OBBBA making it permanent, small businesses can plan ahead with confidence and invest in growth, hiring, and equipment without worrying about losing this benefit.

New Minimum Deduction for Small Businesses

The law also introduces a minimum deduction of $400 for businesses that earn at least $1,000 in a year. This is especially helpful for very small businesses or side hustles that don’t earn a lot but still want some tax relief. Even if your business is tiny, you now get a guaranteed deduction, making the tax system a little friendlier.

Real-Life Examples

Eligible workers include:

• Jessica, a freelance graphic designer: She earns $50,000 a year from her design work. With the 20% deduction, she can reduce her taxable income by $10,000. That could save her around $2,000–$3,000 in federal taxes, depending on her tax bracket.
• Tom, a small bakery owner: Tom makes $5,000 in profits this year. Even though his income is modest, he now qualifies for the $400 minimum deduction, giving him some tax relief instead of paying taxes on the full $5,000.
• Lila, who runs an online side hustle:Lila earns $1,500 a year selling handmade crafts. Without this new law, her deduction might have been minimal, but now she is guaranteed at least $400 off her taxable income, helping her keep more of her earnings to reinvest in supplies.

Phase-Out for Higher Incomes

The QBI deduction isn’t unlimited. For higher-income taxpayers, there is a phase-out, meaning the deduction gradually decreases:

• Single filers: Phase-out starts at around $182,100 of taxable income.
• Married filing jointly: Phase-out starts at around $364,200 of taxable income.

Some businesses—called Specified Service Trades or Businesses (SSTBs)—like law, accounting, consulting, health, and financial services, are more affected. If your income is above the phase-out threshold, your deduction may be reduced or eliminated.

For non-SSTBs, high earners may still get a partial deduction, but it can be limited based on wages paid to employees and property used in the business.

Example:

1. John, a single filer with a consulting business (an SSTB) earning $200,000, would see his deduction reduced because he exceeds the phase-out threshold.
2. Mary, a single filer who owns a bakery (non-SSTB) earning $200,000, may still get a partial deduction based on her wages and property.

Real-Life Examples

• More money in your pocket: Less taxable income means you keep more of what you earn.
• Stability for planning: No more worrying about the deduction disappearing in a few years.
• Help for small and new businesses: Even small side hustles get a tax break.

Why This Matters to You

• More money in your pocket: Less taxable income means you keep more of what you earn.
• Stability for planning: No more worrying about the deduction disappearing in a few years.
• Help for small and new businesses: Even small side hustles get a tax break.

How to Use It

If you’re eligible, this deduction will automatically reduce your taxable business income. However, every business situation is different, so it’s a good idea to check with your accountant or tax preparer to see exactly how much you can save.

Looking Ahead

The OBBBA’s changes are a clear signal that lawmakers want to support small businesses and entrepreneurs. By making the 20% deduction permanent and adding a minimum for smaller earners, they’re helping ensure that even the smallest business can thrive.

Whether you run a shop, a consulting business, or a side gig, this law means more money stays in your hands and less goes to taxes—something every small business owner can appreciate.