The 20% Qualified Business Income deduction was set to expire at the end of 2025 — eliminating one of the most valuable tax benefits for small business owners overnight. The One Big Beautiful Bill Act made it permanent. Here's what that means for Maryland pass-through business owners and why the Maryland angle matters just as much as the federal one.
The Qualified Business Income (QBI) deduction — technically Section 199A of the Internal Revenue Code — allows owners of pass-through businesses to deduct up to 20% of their qualified business income from their federal taxable income. It applies to sole proprietors, S-Corp owners, partners, and LLC members — essentially anyone whose business income flows through to their personal federal return rather than being taxed at the corporate level.
The deduction was created by the 2017 Tax Cuts and Jobs Act as a way to give pass-through businesses a tax benefit comparable to the corporate tax rate reduction that C-corporations received in the same legislation. Before the OBBBA, it was scheduled to expire on December 31, 2025. For a full overview of OBBBA changes, see our complete OBBBA guide.
The OBBBA made the QBI deduction permanent — removing the 2025 expiration date entirely. It also added a new $400 minimum deduction for taxpayers with qualified business income below the threshold that would otherwise produce a $400 deduction at 20%. This ensures very small businesses and part-time self-employed individuals still receive some benefit even at lower income levels.
Section 199A QBI deduction made permanent — no expiration. New $400 minimum deduction added for qualifying taxpayers. Income thresholds for the W-2 wage limitation adjusted for inflation going forward. Effective for tax years beginning after December 31, 2025.
The basic calculation is straightforward for most small business owners below the income thresholds:
For a sole proprietor with $150,000 in net self-employment income, the QBI deduction is $30,000 — reducing federal taxable income from $150,000 to $120,000. At a 22% federal bracket, that's $6,600 in federal tax savings.
For higher-income taxpayers, the QBI deduction becomes more complex. Above certain income thresholds, the deduction may be limited based on the W-2 wages paid by the business and the unadjusted basis of qualified property. For 2025:
Professional service businesses — including accounting firms, law practices, medical practices, and financial advisors — are classified as Specified Service Trades or Businesses (SSTBs). Owners of these businesses above the income thresholds lose the QBI deduction entirely. Below the thresholds, they qualify for the full 20% deduction. This makes income management and S-Corp structuring especially important for high-income professionals.
Here is the most important Maryland-specific point in this article: Maryland does not conform to the QBI deduction. The 20% deduction that reduces your federal taxable income does not reduce your Maryland taxable income by a single dollar.
This is one of the most significant Maryland-federal tax differences for small business owners. Consider a Frederick County contractor with $200,000 in qualified business income:
| Tax Item | Federal | Maryland |
|---|---|---|
| Qualified business income | $200,000 | $200,000 |
| QBI deduction (20%) | −$40,000 | $0 (not available) |
| Taxable income from business | $160,000 | $200,000 |
| Tax on business income | ~$35,200 (22%) | ~$17,500 (8.75%) |
The $40,000 QBI deduction saves approximately $8,800 in federal tax — but generates zero Maryland tax savings. The full $200,000 is taxable in Maryland at the combined 8.75% rate. This Maryland gap is one of the key reasons why Maryland-specific tax reduction strategies remain important even as federal tax burdens decrease. See our article on Maryland vs federal tax differences for a complete breakdown.
Because Maryland does not conform to the QBI deduction, Maryland business owners need alternative strategies to reduce their Maryland income tax. The Maryland Pass-Through Entity (PTE) tax election is the primary tool available.
When a Maryland S-Corp or partnership makes the PTE election, the entity pays Maryland income tax at the entity level. This generates a federal deduction — reducing the owner's federal taxable income by the amount of Maryland tax paid. This deduction is separate from the QBI deduction and is not subject to SSBT limitations or income thresholds.
The two strategies work together:
See our detailed guide on the Maryland PTE tax election for how these interact specifically.
For Maryland business owners considering an S-Corp election, the permanent QBI deduction adds an important dimension to the analysis. The S-Corp election reduces self-employment tax by splitting income between salary and distributions — but it also affects the QBI deduction calculation in several ways:
As an S-Corp owner, your W-2 salary is not qualified business income — only distributions from the S-Corp qualify as QBI. This means the higher your reasonable salary, the lower your QBI and the smaller your QBI deduction. For business owners above the income thresholds in non-SSTB businesses, paying a higher W-2 salary also increases the W-2 wage base used in the limitation calculation, which can help preserve the deduction.
For S-Corp owners below the income thresholds, the interaction is simpler — S-Corp distributions qualify as QBI and get the 20% deduction, while the W-2 salary reduces the QBI amount but also reduces self-employment tax. The combined effect of S-Corp election plus QBI deduction often produces the lowest total federal tax for business owners in the $80,000 to $400,000 net income range.
See our S-Corp vs. LLC guide for a full analysis of how these decisions interact for Maryland business owners.
The permanent QBI deduction is most valuable for:
Many Frederick County landlords are unaware that rental income may qualify for the QBI deduction. Rental income qualifies as QBI if the rental activity rises to the level of a trade or business — which the IRS has provided a safe harbor for: 250 or more hours of rental services per year, with adequate records.
For landlords with multiple properties or active rental management, the QBI deduction on rental income can be significant. A landlord with $100,000 in net rental income who qualifies gets a $20,000 federal deduction — saving approximately $4,400 in federal tax at a 22% rate.
We calculate the QBI deduction for every eligible client, analyze the S-Corp and PTE election interactions, and track the Maryland conformity gap to ensure you are reducing both federal and Maryland tax — not just one. If you have not had a QBI analysis as part of your tax preparation, contact us. Book a free consultation here.
It depends on your income. Accounting is classified as a Specified Service Trade or Business (SSTB). If your taxable income is below $197,300 (single) or $394,600 (married filing jointly) for 2025, you qualify for the full 20% QBI deduction. Above those thresholds, the deduction phases out and is eliminated entirely once income exceeds the phaseout range. Income management strategies — including S-Corp salary planning — can help keep income below the threshold in some cases.
No. The QBI deduction reduces your federal income tax but does not reduce self-employment tax. SE tax is calculated on net self-employment income before the QBI deduction. This is one of the reasons the S-Corp election — which does reduce SE tax — remains valuable even with the permanent QBI deduction in place.
If your qualified business income is negative — a qualified business loss — it carries forward to reduce your QBI in future years. A business loss in 2025 reduces the QBI deduction available in 2026 and subsequent years until the carryforward is used up. Multiple businesses with both positive and negative QBI are netted together before the 20% deduction is calculated.
No. The QBI deduction only applies to pass-through income — income that flows through to your personal return from a sole proprietorship, partnership, S-Corp, or LLC taxed as a pass-through. C-Corporation dividends paid to shareholders do not qualify as QBI. This is one of the reasons most small businesses are better structured as pass-through entities rather than C-Corps.
Roy Cogliandolo, CPA
Mercer Flanagan · Frederick, MD · February 2026
The permanent QBI deduction is one of the most valuable federal benefits for pass-through business owners — but it requires careful calculation, especially for S-Corp owners and higher-income professionals. We make sure you never leave it on the table.
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