What if we told you one of the largest tax breaks for small business owners was supposed to disappear after 2025…

But instead, it’s now here to stay?

That’s exactly what happened with the Section 199A Qualified Business Income (QBI) deduction.

For business owners in construction, real estate, professional services, and tech, this change is significant. Section 199A has long been one of the most valuable federal tax deductions available to pass-through businesses. Until recently, it came with a hard expiration date.

Now, that uncertainty is gone.

In this article, we’ll break down what Section 199A is, what changed under legislation commonly referred to as the One Big Beautiful Bill (OBBBA), and why this matters for small business owners planning for 2026 and beyond.

What Is Section 199A?

Section 199A was introduced under the Tax Cuts and Jobs Act of 2017. Its purpose was to provide tax relief to small business owners operating through pass-through entities, since corporations received a permanent reduction in their tax rate.

If you operate as a:

• Sole proprietorship

• LLC (single-member or multi-member)

• Partnership

• S corporation

You may be eligible for a deduction of up to 20% of your qualified business income.

How the Deduction Works

Section 199A allows eligible taxpayers to deduct up to 20% of qualified business income on their individual return.

A simple example:

• Business profit: $100,000

• Potential Section 199A deduction: $20,000

• Taxable income reduced to: $80,000

This deduction reduces taxable income, not self-employment tax. And while the calculation can become complex at higher income levels, the benefit can be substantial.

For many profitable small businesses, Section 199A is one of the largest deductions available each year.

The Problem Section 199A Used to Have

From the start, Section 199A was designed as a temporary provision. Under the original law, it was scheduled to sunset after December 31, 2025.

That expiration date created real planning challenges:

• Should you restructure your entity now or wait?

• Should you invest in assets if the deduction might disappear?

• Should you plan compensation strategies around a benefit that could vanish?

For years, business owners and advisors were forced to plan around uncertainty.

That has now changed.

The One Big Beautiful Bill and Section 199A Permanence

In 2025, Congress passed major tax legislation commonly referred to as the One Big Beautiful Bill.

Among its many provisions affecting business owners, one change stood out clearly:

Section 199A was made permanent.

The scheduled 2025 sunset was eliminated. The deduction is no longer temporary or subject to last-minute extensions.

This permanence fundamentally changes how small business owners can approach tax planning. Instead of reacting year by year, we can now build long-term strategies around Section 199A.

For pass-through businesses, that certainty is just as valuable as the deduction itself.

What Changed Starting in 2026

Beginning in tax year 2026, the Section 199A rules become more favorable for many taxpayers.

Expanded Income Phase-In Ranges

Under prior law, higher-income business owners often saw their deduction limited or eliminated once taxable income exceeded certain thresholds. Wage limitations and asset tests phased in quickly, which caused many owners to lose the benefit entirely.

The updated rules expand those phase-in ranges and index them for inflation.

That means:

• More business owners qualify

• Fewer cliff effects

• Greater ability to retain partial or full deductions at higher income levels

Example

Assume you are married filing jointly and your business generates approximately $500,000 of taxable income.

Under the old framework, this income level frequently resulted in a reduced or eliminated Section 199A deduction, depending on wages paid and assets owned.

Under the updated rules effective in 2026, expanded thresholds allow many business owners at this level to retain meaningful Section 199A benefits when their businesses are structured properly.

In practice, this can result in five-figure annual tax savings.

A Technical Note on Itemized Deductions

Section 199A is calculated based on taxable income, not gross income. That distinction matters.

Itemized deductions, retirement contributions, depreciation, and owner compensation all interact with the Section 199A calculation.

In some cases:

• Certain deduction choices may slightly reduce the final QBI deduction

• In other cases, proper coordination can increase the benefit

This is not a reason to avoid Section 199A. It’s a reminder that the deduction works best when it’s planned for proactively, not calculated after the fact.

This is where experienced CPA and virtual CFO guidance becomes critical.

Why This Matters for California Business Owners

California business owners face unique challenges:

• High state income taxes

• High operating costs

• Complex compliance rules

Federal deductions like Section 199A help offset some of that burden. When layered with proper entity structuring, compensation planning, and depreciation strategy, the impact compounds.

We see the strongest benefits among:

• Construction companies

• Real estate investors and operators

• Asset-heavy service businesses

• Professional firms

• Tech and consulting companies

These are exactly the types of businesses Section 199A was designed to support.

Common Section 199A Mistakes We See

Even with permanence, many business owners fail to capture the full benefit of Section 199A.

Common issues include:

• Incorrect entity selection

• Improper S-corporation salary levels

• Ignoring W-2 wage or asset tests

• Poor coordination between multiple businesses

• Treating Section 199A as a filing-time calculation instead of a planning tool

Section 199A rewards businesses that plan ahead.

How We Help Clients Maximize Section 199A

As a California-based CPA and virtual CFO firm, we approach Section 199A as part of a broader tax strategy.

Our planning typically includes:

• Entity structure optimization

• Owner compensation analysis

• Multi-entity coordination

• Timing of income and deductions

• Long-term planning now that the deduction is permanent

The goal is straightforward: legally reduce taxes while supporting sustainable business growth.

Final Thoughts

Let’s keep it simple.

• The Section 199A 20% deduction is now permanent

• Starting in 2026, expanded thresholds allow more owners to qualify

• Construction, real estate, and professional service businesses are major winners

• Long-term planning is now possible without sunset risk

This is one of the few major tax provisions designed specifically for small and mid-sized businesses. Used correctly, it can put meaningful money back into your business every year.

Ready to See How This Applies to Your Business?

If you’re not sure whether you qualify, how much you can deduct, or whether your current structure is optimized, that’s normal.

That’s what we’re here for.

Schedule a consultation with our California CPA and virtual CFO team to get proactive tax planning instead of last-minute surprises!

More money in your pocket and less to Uncle Sam.

That’s a win.