The OBBBA Made the 20% Pass-Through Deduction Permanent: What Partnership Owners Need to Know

For the past several years, every partnership owner has had to live with a quiet threat hanging over their tax return: the 20% qualified business income deduction under Section 199A was set to expire after 2025. A deduction that could be worth tens of thousands of dollars per year was on borrowed time. That changed when the One Big Beautiful Bill Act (OBBBA) was signed into law -- the deduction is now permanent, and the rules around who qualifies have expanded. If you own a stake in a partnership or multi-member LLC taxed as a partnership, this is the most significant piece of tax news that directly affects your bottom line in 2026 and every year that follows.

Here is what changed, what stayed the same, and what you need to do about it.

What Is the QBI Deduction and Why Does It Matter for Partnership Owners?

The qualified business income (QBI) deduction allows owners of pass-through businesses -- partnerships, S corporations, and sole proprietorships -- to deduct up to 20% of their qualified business income from their federal taxable income. Your partnership does not pay corporate income tax. The income flows through to each partner's personal return via the Schedule K-1. The QBI deduction sits on top of that, reducing the amount of that pass-through income that is actually taxable to you.

The result is that your effective federal income tax rate on partnership income can be meaningfully lower than your marginal rate. A partner in the 37% bracket who qualifies fully for the QBI deduction is effectively paying tax at a rate closer to 29.6% on that income. That gap matters a great deal at scale.

If you own an S corporation in addition to a partnership interest, the same deduction applies to your S corp income as well. The S Corp Tax Book at thescorptaxbook.com covers the QBI deduction from the S corp angle in detail -- the mechanics are similar, but the interplay with reasonable compensation creates some planning differences worth understanding.

What the OBBBA Changed

The Deduction Is Now Permanent

Before the OBBBA, Section 199A was scheduled to sunset after December 31, 2025. If Congress had not acted, partnership owners would have lost this deduction entirely starting with their 2026 tax year. The OBBBA permanently extended it with no expiration date. For the first time since the deduction was created in 2017, you can plan your business structure and distributions around it without worrying that the rules will change underneath you.

Expanded Phase-In Ranges for Service Businesses

The QBI deduction has always had more complicated rules for owners of specified service trade or businesses (SSTBs) -- that includes law firms, medical practices, financial advisory firms, consulting businesses, and similar service-oriented partnerships. For SSTBs, the deduction phases out as income rises above a threshold.

Under pre-OBBBA law, the phase-out range for married filing jointly filers was $100,000 wide (starting at the threshold). The OBBBA expanded that phase-out range to $150,000 for married filing jointly and from $100,000 to $150,000 wide for single filers. This means more service business owners can claim a partial QBI deduction where they were previously phased out entirely, and those who were partially phased out will now get a larger deduction.

A New Minimum Deduction

The OBBBA also added a minimum QBI deduction of $400 (inflation-adjusted in future years) for any taxpayer with at least $1,000 of qualified business income from an active business in which they materially participate. This is a small number in absolute terms, but it matters because it establishes the principle that active owners who participate in their partnerships will always get at least something from the deduction, regardless of wage and investment limitations.

What Did Not Change

The core structure of the deduction is intact. You still deduct up to 20% of your qualified business income, subject to the W-2 wage limitation and the wage-plus-capital alternative for capital-intensive businesses. The 37% bracket income thresholds (above which the wage limitation kicks in) are still in place, though they are inflation-adjusted annually. The SSTB categories are unchanged -- if you were in a specified service trade or business before, you still are.

Qualified business income still means ordinary income from the partnership's trade or business activities. It excludes capital gains, dividends, interest income (unless from the trade or business), and guaranteed payments. If you are receiving guaranteed payments from your partnership for services, those payments are not QBI -- they are ordinary income on your return, subject to self-employment tax, but they do not get the 20% deduction treatment.

A Concrete Example: What This Means in Real Dollars

At the partnership level, these numbers multiply across all partners. A three-partner firm where each partner earns $400,000 to $500,000 in distributive share could be collectively saving $80,000 to $120,000 per year in federal income taxes from this one deduction alone. The permanence of the OBBBA means that savings compounds over the life of the business.

How to Make Sure You Are Capturing the Full Deduction

Verify the Partnership Is Reporting Section 199A Information Correctly on Your K-1

The QBI deduction starts with what your partnership reports on your Schedule K-1, specifically in Box 20 with Code Z. This section reports your share of QBI, W-2 wages allocable to the QBI, and unadjusted basis of qualified property. If these numbers are missing or incorrect on your K-1, your tax preparer cannot accurately calculate your deduction. Ask your partnership's accountant to confirm that the 199A disclosures are complete before K-1s are issued.

Understand the W-2 Wage Limitation if Your Income Exceeds the Threshold

For 2026, if your taxable income exceeds approximately $394,600 (single) or $789,200 (married filing jointly) -- the thresholds are inflation-adjusted -- the QBI deduction is limited to the greater of 50% of the partnership's W-2 wages allocable to you, or 25% of W-2 wages plus 2.5% of the unadjusted basis of qualified property. If your partnership has few employees and pays relatively low wages, this limitation can significantly reduce your deduction. Knowing this in advance lets you structure compensation and capital expenditures to maximize what you can claim.

Do Not Mix Guaranteed Payments With Distributive Share in Your Planning

Guaranteed payments are a useful tool for paying working partners a predictable income -- they are deductible by the partnership and ordinary income to the recipient. But they are not QBI. If your compensation structure leans heavily on guaranteed payments, you may be leaving QBI deduction dollars on the table. A review of how your partnership agreement allocates income versus guaranteed payments is worth doing in light of the permanent QBI deduction. For many partnerships, shifting more compensation from guaranteed payments to distributive share can meaningfully increase the portion of income eligible for the 20% deduction -- though this has to be balanced against self-employment tax and cash flow considerations.

Revisit SSTB Status Annually

If your partnership is in a specified service trade or business, do not assume your status is fixed. Businesses evolve. A consulting firm that has built a significant software product might argue that a portion of its income comes from a non-SSTB activity, allowing that portion to qualify for the full deduction without the SSTB phase-out. These line-drawing exercises require documentation and sometimes IRS guidance, but with the deduction now permanent, the investment in getting this analysis right pays off for years.

What to Do Now

The practical steps are straightforward. First, confirm with your tax advisor that your 2026 partnership return will include the full Section 199A reporting in Box 20 of each partner's K-1. Second, run a projection of your estimated QBI deduction for 2026 given the expanded phase-in ranges -- you may qualify for more than you previously received. Third, review your partnership agreement's compensation structure with the QBI deduction in mind. The deduction is permanent now, which means the long-term savings from optimizing around it are real and compounding.

For a deeper look at partnership income, allocations, and the full range of planning strategies available to partners, the Partnership Tax Strategies book is a good starting point. You can find it at partnershiptaxbook.com/partnership-tax-strategies. And for the full picture of how the OBBBA changes interact with your overall tax plan -- including strategies like entity layering, C corporation conversion analysis, and retirement plan optimization -- the team at AE Tax Advisors can walk you through a customized analysis.