The recently enacted One Big Beautiful Bill Act (OBBBA) made permanent a key tax provision introduced by the Tax Cuts and Jobs Act of 2017 (TCJA) that lowers taxes for the owners of pass-through entities. Unlike C corporations that pay corporate income taxes, profits earned by S corporations, sole-proprietorships, LLCs, partnerships, and others are “passed through” to their owners who are required to pay individual income taxes on those earnings. TCJA introduced the Qualified Business Income (QBI) deduction to lower the taxes pass-through entities pay, allowing owners to deduct certain business income from their taxable income. While TCJA set the QBI deduction to expire at the end of 2025, OBBBA made the provision permanent.

Data summary

• The Tax Cuts and Jobs Act of 2017 (TCJA) introduced the Qualified Business Income (QBI) deduction, which enables owners of pass-through entities such as sole proprietorships and LLCs to deduct up to 20% of their business income from their taxable income. While the QBI deduction had been scheduled to sunset at the end of 2025, the recently enacted One Big Beautiful Bill Act (OBBBA) made the provision permanent.
• In 2022, 15.9% of tax returns claimed the QBI deduction, collectively lowering their taxable incomes by $216.1 billion.
• High income taxpayers are most likely to own pass-through entities and claim the QBI deduction. They also claim the largest average deduction. For example, 73.8% of taxpayers who earned at least $1 million in 2022 claimed the QBI deduction to lower their taxable income by an average of $159,978.
• QBI deductions varied across states, likely influenced by average income and rates of ownership of pass-through entities. West Virginia residents claimed the deduction at the lowest rate (10.1% of tax returns in 2022), and Colorado residents claimed it at the highest rate (20.2%).