Permanent QBI Deduction & Bonus Depreciation
Let’s break down the permanent 20% Qualified Business Income (QBI) deduction and 100% bonus depreciation—two powerful tax provisions that lift cash flow and supercharge investments for pass‑through business owners.
What Is the QBI Deduction?
Qualified Business Income (QBI) is the net profit you earn through a “pass‑through” entity—think sole proprietorships, partnerships, S corporations, and some LLCs. The Tax Cuts and Jobs Act (TCJA) introduced a 20% deduction on QBI, effectively shaving up to 20% off your taxable business income. That means more money stays in your pocket to reinvest and grow.
Key points:
Eligible income: Net business profits (after expenses).
Pass‑through entities: Sole props, partnerships, S corps, LLCs taxed as those.
Not wages: Excludes W‑2 income, capital gains, dividends, interest income.
Why It’s Now Permanent
Originally set to expire after 2025, Congress has now made the 20% QBI deduction permanent. For good. No more mid‑year anxiety on whether your favorite tax break will vanish.
How the 20% Deduction Works
Calculate QBI: Start with your net business profit (Form 1040 Schedule C, K‑1, etc.).
Apply the 20% rate: Multiply your QBI by 20%.
Check limits if you’re a high earner: If your taxable income exceeds certain thresholds ($364,200 MFJ / $182,100 single in 2025), you must consider:
W‑2 wage limit: Deduction can’t exceed 50% of W‑2 wages paid, or 25% of wages plus 2.5% of unadjusted basis in qualified property.
Specified service trade or business (SSTB): Lawyers, doctors, consultants, and other business models that rely on a key individual’s reputation face phase‑outs above the thresholds.
Real‑World Example
Sarah owns an S Corp offering web design services. In 2025, her net QBI is $200,000 and she pays $60,000 in wages. She claims:
20% of $200,000 = $40,000 QBI deduction.
Wage‑based limit check: 50% of $60,000 = $30,000, so her deduction is capped at $30,000.
By documenting her wages clearly, Sarah locks in a $30,000 deduction.
What Is 100% Bonus Depreciation?
Depreciation spreads an asset’s cost over its useful life. Bonus depreciation accelerates that by letting you expense 100% of eligible property in the year it’s placed in service. Thanks to recent tax law changes, that full write‑off is here to stay.
Eligible property generally includes:
New and used machinery, equipment, and computers.
Furniture and fixtures with a recovery period of 20 years or less.
Certain leasehold improvements and qualified film/TV productions.
Important Note: Land, buildings (other than qualified improvements), and intangible assets don’t qualify.
Why Full Expensing Matters
Instant cash‑flow boost: Deduct full cost up front, reducing your taxable income immediately.
Encourages investment: Lowers the after‑tax cost of new equipment.
Real‑World Example
Jake’s landscaping LLC buys a $50,000 small tractor in 2025. Instead of deducting it over 5 years, he expends the full $50,000 in Year 1—saving taxes now and freeing funds for more trailers or a new truck.
How QBI & Bonus Depreciation Interact
By increasing deductions in Year 1, bonus depreciation can lower your QBI—potentially reducing your 20% deduction. Tackling this:
Estimate both deductions before year end.
Sequence large purchases: Spread asset buys across years if you need to optimize QBI limits.
Monitor taxable income: Stay aware of phase‑in thresholds.
Pro Tip: In late Q4, run a mini profit forecast. If you’re near a QBI threshold, consider deferring a purchase until January or vice versa.
Key Takeaways
The 20% QBI deduction and 100% bonus depreciation are now permanent.
QBI delivers up to 20% off pass‑through profits—watch wage and SSTB limits if you’re a high earner.
Bonus depreciation lets you expense qualifying assets immediately, supercharging cash flow.
Plan purchases and wages strategically to avoid unintended limitation conflicts.
Have questions about what you read? Email us at contact@sotecpa.com.
