Once upon a tax season, America fell in love with three little letters: LLC.
Everyone rushed to register one — the barista, the YouTuber, the guy with a toolbox and Wi-Fi. “I have an LLC now,” became the new “I’m starting keto.”
And somewhere in that enthusiasm, a myth was born:
“I have an LLC, so I don’t pay taxes.”
If only.
Because while LLCs are fantastic vehicles for protection and flexibility, they are not tax shields. They are pass-throughs — and the rules of that game just got a significant update.
For years, small business owners lived under the shadow of a deadline: the Qualified Business Income (QBI) deduction was set to expire after 2025. Then, on July 4, 2025, Congress signed the One Big Beautiful Bill Act (OBBBA) into law — and removed that deadline entirely.
The deduction is now permanent. But permanent doesn’t mean unchanged. Here’s what every pass-through business owner needs to know.
The QBI Deduction: A 20% Gift That’s Here to Stay
Back in 2017, the Tax Cuts and Jobs Act (TCJA) introduced the Qualified Business Income (QBI) deduction — a 20% deduction on “qualified income” from pass-through businesses like LLCs, S corporations, and partnerships.
It was Congress’s way of saying:
“Hey, we gave corporations a big tax cut. You can have one too.”
Under the TCJA, that deduction came with an expiration date after 2025. The OBBBA removed it. The 20% deduction is now a permanent feature of the tax code — and for 2026, it comes with expanded benefits that put more money back in the hands of more business owners.
First, Let’s Clear Up the Basics
What QBI Actually Is:
It’s 20% of your net qualified business income — basically your profit after expenses, not your total sales. If you earn $100,000 in qualified business income, you may deduct $20,000 from taxable income.
What QBI Is Not:
- Not a deduction on gross revenue.
- Not available for wages or guaranteed payments to partners.
- Not a “magic 20% off coupon” for anyone with an LLC.
Who Gets It (and Who Doesn’t)
QBI applies to most pass-throughs:
- Sole proprietorships
- Partnerships
- S-corps
- LLCs taxed as any of the above
But not all businesses qualify equally. That’s where the phaseouts and limitations come in — and where the IRS reminds everyone that “simple” and “tax code” are not synonyms.
The 2026 Thresholds: More Room at the Table
One of the OBBBA’s most meaningful changes: the income ranges where limitations kick in have been expanded by 50%. That means more business owners can access the full deduction — or at least more of it — than before.
Approximate thresholds for 2026:
- Single filers: Full deduction below ~$200,000; phases out to ~$275,000
- Married filing jointly: Full deduction below ~$400,000; phases out to ~$550,000
Above the phase-out ceiling, your deduction depends on W-2 wages paid and the cost of qualified business property.
If you’re in a “Specified Service Trade or Business” (SSTB) — think doctors, lawyers, consultants, accountants, financial advisors — the deduction still phases out completely once income crosses the top threshold. That part hasn’t changed.
Yes, the more successful you are, the less of this deduction you get. But the ceiling is now higher than it’s ever been.
Example: Same Entity, Different Outcomes
Builder A: LLC, earns $180,000.
→ Below the threshold. Gets full 20% deduction = $36,000 off taxable income.
Builder B: LLC, earns $500,000.
→ Above the phase-out ceiling. QBI limited by wage/property formula; deduction shrinks.
Consultant C: Earns $500,000 in a professional services field.
→ SSTB rules apply → QBI = $0.
Same entity type. Different results. That’s the pass-through puzzle.
The Fine Print: W-2 Wages & Property Rule
Once you cross the income threshold, your deduction is limited to the greater of:
- 50% of W-2 wages paid by the business, or
- 25% of W-2 wages + 2.5% of qualified property (like machinery or equipment).
Translation: If your LLC has no payroll and no fixed assets, your deduction may shrink significantly at higher income levels.
Which means the “I don’t need employees” strategy might save you headaches today — and cost you thousands tomorrow.
Planning Moves That Actually Work
1. Pay Yourself Right
If your LLC elects S-Corp status, pay a reasonable salary (W-2) and take the rest as distribution. This balances payroll tax savings with QBI eligibility.
2. Check Your Entity Type
Some businesses save thousands by switching from sole proprietorship to S-Corp — others lose QBI by doing so. The key is modeling both scenarios.
3. Invest in Depreciable Assets
Property owned by your business can boost your QBI formula. That excavator might save more than your accountant’s sanity.
4. Mind the SSTB Trap
If you’re in a service business nearing the threshold, shift income strategically — defer contracts, accelerate expenses, or contribute to retirement plans to stay under the cap.
5. Claim the New $400 Minimum
New for 2026: if you have at least $1,000 in qualified business income and you materially participate in your business, you’re guaranteed a minimum $400 QBI deduction — even if the standard calculation would give you less. Small business, small profit? You still get something.
Fun Fact Corner
- Over 95% of U.S. businesses are pass-through entities.
- In 2023, the QBI deduction reduced taxes for over 20 million small businesses.
- The average QBI savings per filer: $7,000–$12,000.
- One taxpayer once tried to claim QBI for “consulting on crypto dreams.” The IRS declined politely.
How JS Morlu Helps
At JS Morlu, we speak fluent Section 199A — so you don’t have to.
The OBBBA changed the rules. We’ve already updated our playbook. Our pass-through tax planning services include:
✅ QBI calculation and scenario modeling under the new 2026 rules
✅ SSTB phaseout forecasting with expanded thresholds
✅ Payroll structure planning (W-2 vs distributions)
✅ Entity selection strategy (LLC vs S-Corp vs partnership)
✅ Year-end income shifting and deduction timing
We don’t just prepare your return — we design it for your advantage.
Real Story: The Consultant Who Saved $18,400
A professional services client came to us earning $350,000. Under her default structure, she was about to lose her QBI deduction entirely.
We restructured her LLC to S-Corp, added a $90K salary, adjusted contributions to her Solo 401(k), and reduced taxable income to $295,000. Result: she regained full QBI eligibility and saved $18,400 in taxes — with zero change in business operations.
That’s what strategy looks like. And with QBI now permanent, that strategy compounds every single year.
The Bottom Line
Your LLC doesn’t mean no tax — it means better tax strategy. The 20% QBI deduction isn’t automatic — it’s earned through structure, timing, and planning.
The good news? Congress just confirmed this deduction isn’t going anywhere. The even better news? The 2026 rules are more generous than ever.
The only question left is whether you’re set up to take full advantage of them.
Ready to Solve the Pass-Through Puzzle?
Book your QBI & Pass-Through Tax Strategy Session today. We’ll show you how to maximize your deduction, navigate the new rules, and make the most of a tax benefit that’s finally here to stay.