QBI Deduction at 23%: How OBBBA's Rate Increase Changes Pass-Through Tax Planning

The One Big Beautiful Bill Act (OBBBA) made two changes to Section 199A that every CPA with pass-through clients must internalize: it made the deduction permanent, and it raised the deduction rate from 20% to 23%. The permanence matters for long-term planning horizons. The rate change matters right now. A 23% deduction reduces the effective top marginal rate on qualified pass-through income from 29.6% to 28.49% — a modest headline difference that compounds into meaningful dollar amounts for high-income clients and reshapes the math on entity elections, salary modeling, and retirement plan contribution sizing. All existing Section 199A rules remain intact: the W-2 wage limitation, SSTB restrictions, and income phase-out thresholds still apply. But every calculation that previously used 20% needs to be rerun at 23%. This article covers what changes, what doesn't, and what CPAs should model before filing 2026 returns.

What Changed Under OBBBA: The Rate Increase

Prior to OBBBA, Section 199A (IRC §199A, as enacted by TCJA Pub. L. 115-97) allowed eligible pass-through owners to deduct up to 20% of qualified business income (QBI). OBBBA amended §199A to increase that rate to 23% for tax years beginning after the Act's enactment date. The change applies to all income that qualified for the deduction under the prior rules — sole proprietorships, partnerships, S-Corporations, and certain trusts and estates.

The rate increase in practice:

On $500,000 of QBI at the top marginal rate, the difference is approximately $5,550 in additional federal tax savings per year. Across multiple years, with a permanent deduction, this compounds. For clients with $1M or more in annual QBI, the annual incremental savings exceeds $11,000 — enough to justify reconsidering prior planning decisions that were marginal at 20%.

The permanence of the deduction (ending the TCJA sunset after 2025) also changes the planning environment. Strategies previously evaluated over a finite horizon — such as an S-Corp election for a business expecting pass-through income until 2025 — can now be evaluated on an open-ended basis. The election economics improve when you remove the expiration risk.

For a full explanation of the underlying mechanics — what qualifies as QBI, the SSTB definition, and how Form 8995-A works — see the QBI deduction guide for 2025.

S-Corp Salary Modeling: The Tradeoff Changes

The S-Corp salary-versus-distribution split has always required simultaneous modeling of FICA savings and QBI. The 23% rate changes the QBI side of that model.

How the tradeoff works: An S-Corp owner's W-2 salary is excluded from QBI. Every dollar paid as salary reduces the QBI base by one dollar — which now costs 23 cents of deduction at the marginal rate, compared to 20 cents before. This does not mean paying less salary is now better; the salary reduction still saves 15.3% FICA (up to the Social Security wage base) and 2.9% Medicare on amounts above it. But the cost of reducing salary — in terms of QBI dollars foregone — is slightly higher at 23%.

Simple example:

Assume a single-filer S-Corp owner with $400,000 net pass-through income above the §199A threshold (so the W-2 wage limitation applies), paying themselves a $100,000 salary. At 37% marginal rate:

• Prior law (20%): Shifting $10,000 from distribution to salary reduces QBI by $10,000, losing $2,000 in deduction, costing $740 in taxes ($2,000 × 37%). But saves $2,900 in Additional Medicare Tax on the $10,000 now treated as wages (assuming above the Social Security base). Net: marginal.
• OBBBA (23%): Same $10,000 shift loses $2,300 in deduction, costing $851 in taxes ($2,300 × 37%). Same $2,900 AMT savings. Net: still marginal, slightly less favorable to lower salary.

The directional conclusion is the same: for clients well above the Social Security wage base, salary reduction generates FICA savings that exceed the QBI deduction cost. But the 23% rate raises the QBI cost threshold, making the math tighter for clients near the wage base ceiling. Rerun the model at 23% for any client where the salary decision was close at 20%.

For the step-by-step salary documentation process and IRS audit benchmarks, see the guide on how to calculate and document a reasonable S-Corp salary.

W-2 Wage Limitation: Higher Ceiling, Same Calculation

For high-income non-SSTB clients above the §199A phase-out threshold (2025: $247,300 single / $494,600 MFJ), the W-2 wage limitation caps the deduction at the greater of:

• 50% of W-2 wages paid by the qualified business, or
• 25% of W-2 wages plus 2.5% of the unadjusted basis of qualified depreciable property

This limitation is computed the same way at 23% as it was at 20%. What changes is the value of satisfying the limitation. Previously, a $10,000 increase in the W-2 wage cap unlocked up to $2,000 in deduction (20% × $10,000). At 23%, the same increase unlocks up to $2,300.

This makes W-2 wage management — hiring decisions, profit sharing contributions, and timing of payroll — slightly more valuable at 23%. For capital-intensive businesses relying on the 25%/2.5% alternative limitation, the same logic applies: the depreciable property component that previously generated $250 per $10,000 of qualified basis now generates $287.50.

For businesses that were near the W-2 wage cap boundary at 20% and previously concluded the deduction was fully limited, revisit the analysis. A business that could unlock $20,000 of additional QBI deduction by adding $40,000 in W-2 wages now saves $7,400 (23% × $20,000 × 37%) rather than $6,400 — still likely not enough to justify the payroll cost, but the breakeven point shifts slightly in favor of adding wages. For a complete salary-modeling framework under OBBBA's new $275,000/$550,000 phase-out thresholds — including the proportional phase-in calculation, UBIA offset strategy, and SSTB corridor implications — see QBI Wage-Limit Strategies Post-OBBBA.

SSTB Clients Below the Threshold: Higher Stakes

The 23% rate change is most clearly beneficial for clients who are below the §199A phase-out threshold — where the deduction is simple, uncapped, and not restricted by SSTB rules. This is where physicians, lawyers, and accountants with taxable income under $197,300 (single) or $394,600 (MFJ) in 2025 receive the full deduction without limitation.

For SSTB clients below threshold, the marginal rate on pass-through income is now 28.49% rather than 29.6%. The deduction they were already getting is worth more. No planning change is required — but the tax benefit of keeping income below the threshold has increased. The stakes of crossing the phase-out range are now higher.

Planning implication: For SSTB clients who hover near the phase-out threshold, the benefit of remaining below it increased by 15% (the incremental deduction benefit went from 20% to 23% of QBI). Retirement plan contributions, timing of income recognition, and charitable deduction strategies that pull taxable income below $197,300 (single) now generate more savings per dollar spent. For clients who were marginal on a defined benefit plan contribution — borderline between the cost and the tax savings — rerun the numbers at 23%.

For SSTB clients above the upper threshold, the deduction is still zero. The 23% rate provides no benefit to fully phased-out SSTB owners. Planning for that group continues to focus on reducing taxable income into or below the phase-out range.

Strategic Planning Implications for 2026 and Beyond

The combination of permanence and a 23% rate changes how CPAs should frame pass-through tax planning across several dimensions:

Entity elections. The S-Corp election breakeven — the net profit level at which FICA savings exceed compliance costs — has not changed, but the QBI planning layer has become more valuable. For high-income clients who were not yet S-Corps because the FICA math was marginal, the 23% QBI deduction adds modestly to the case. Combine this with the permanent $40,000 SALT cap increase under OBBBA and the full picture of the 2026 planning environment is materially different from 2025.

Retirement plan sizing. The deduction for retirement plan contributions reduces QBI dollar for dollar (by reducing taxable income and, indirectly, the QBI base). At 23%, each dollar of retirement plan contribution now costs $0.23 of QBI deduction at the marginal rate, up from $0.20. For below-threshold SSTB clients using large SEP-IRA or defined benefit contributions to stay under the phase-out range, this cost is now slightly higher. Model the net tax impact explicitly; a large DB contribution that previously generated a tax loss on net could now generate a smaller loss or break even.

Multi-year planning. The deduction is now permanent — there is no longer a sunset to plan around. Decisions made in 2026 about entity structure, capital investment, and payroll structure should be evaluated on a long-term basis. The 23% rate is not a temporary planning window; it is the new baseline.

Income aggregation elections. Under Treas. Reg. §1.199A-4, related businesses can aggregate their QBI for purposes of the W-2 wage limitation. At 23%, the benefit of aggregating a capital-intensive entity with a labor-light entity to satisfy the wage limitation increases proportionally. If aggregation was not previously worth the administrative burden, revisit the calculation at 23%.

Pass-through entity tax (PTET) elections. Because PTET payments reduce the entity's income, they also reduce each owner's QBI. At 23%, the QBI deduction cost of a PTET election is slightly higher than at 20% — a factor CPAs must net against the SALT benefit when deciding whether to maintain elections after OBBBA's $40,000 SALT cap. For the full interaction framework by income band, see SALT Cap and PTET Elections After OBBBA: When to Keep, Modify, or Drop the Election.

To reduce self-employment and Medicare taxes simultaneously while preserving the QBI deduction, see the full strategy guide on minimizing self-employment tax for high-earning clients.

FAQ

What is the new QBI deduction rate under OBBBA?

OBBBA increased the Section 199A QBI deduction from 20% to 23%, effective for tax years beginning after the Act's enactment. The deduction is also now permanent — there is no longer a sunset date.

Do the income thresholds and W-2 wage limitation change at 23%?

The thresholds and wage limitation formula are unchanged. The phase-out begins at $197,300 (single) and $394,600 (MFJ) for 2025, inflation-adjusted going forward. The W-2 wage limitation cap formula (50% of wages, or 25% of wages plus 2.5% of qualified property basis) is the same. Only the deduction rate changes from 20% to 23%.

Does the 23% rate apply to SSTB clients?

Yes, for SSTB clients below the phase-out threshold, the 23% rate applies without restriction. Above the upper threshold, SSTB owners still receive zero deduction. The 23% rate is only valuable for SSTB owners who are fully below the threshold.

How does the 23% rate affect S-Corp salary planning?

Each dollar of salary paid by the S-Corp reduces QBI by one dollar. At 23%, losing $1 of QBI costs $0.23 in deduction rather than $0.20. This slightly raises the cost of minimizing salary to maximize the QBI deduction. The FICA savings from salary reduction remain unchanged, so the net effect is to make extremely low salary strategies marginally less attractive relative to prior law. Run updated models for any client where the prior analysis was close.

Does the 23% rate change Form 8995 or 8995-A?

The IRS will update Forms 8995 and 8995-A to reflect the 23% rate. CPAs using tax software should verify that their software has been updated for the OBBBA changes before preparing 2026 returns. The structural logic of both forms — separating QBI computation from the W-2 wage and SSTB limitation calculations — remains the same.

When did the 23% rate take effect?

The 23% rate applies to tax years beginning after the OBBBA enactment date. For calendar-year taxpayers, this means the first affected return is for tax year 2026. For tax year 2025 returns filed in 2026, the rate is still 20% under prior law.

What other OBBBA changes interact with the 23% QBI rate?

OBBBA also introduced deductions for qualified tip income and qualified overtime premium pay, raised the SALT deduction cap, and made several other individual and business tax changes. The QBI rate increase interacts most directly with the SALT cap increase: pass-through owners who now benefit from a higher SALT deduction may see reduced taxable income, which can affect where they fall relative to the §199A phase-out thresholds. For the tip and overtime deduction rules, see the OBBBA tip and overtime pay deduction guide.

Arvori helps CPAs manage client communication at scale — including delivering proactive tax planning updates like the OBBBA QBI changes to every affected client. Learn how Arvori supports pass-through tax advisory practices at arvori.app.