Gina Lee
Gina Lee is your trusted guide for U.S. tax law, corporate compliance, and estate planning, providing personalized, strategic counsel to help achieve your financial and personal goals with confidence.
This article is the fourth installment in our focused content series examining the One Big Beautiful Bill Act and its implications for individual taxpayers, estate planning, and businesses. The previous articles in the series may be found below:
1. The One Big Beautiful Bill Act: What It Is and How It Affects Individuals
2. The One Big Beautiful Bill Act and Its Impact on Estate and Gift Taxes
3. The One Big Beautiful Bill Act: What It Is and How It Affects Businesses
SALT Deduction Cap Increased
The One Big Beautiful Bill Act (“OBBBA”) signed into law on July 4, 2025, permanently extends and expands upon certain provisions of the 2017 Tax Cuts and Jobs Act (“TCJA”). One of the provisions was the TCJA’s $10,000 cap on the state and local tax (SALT) deduction, which was originally set to expire at the end of 2025. Without legislative action, the cap would have been lifted, allowing taxpayers who itemize deductions to deduct the full amount of state and local income taxes , property taxes, and sales taxes. Instead, he OBBBA kept the SALT deduction cap but increased it to $40,000 for tax years 2025 to 2029. This higher $40,000 cap ($20,000 for taxpayers married filing separately) applies to taxpayers with income below $500,000. For those earning above the threshold, the maximum deduction is gradually reduced at a rate of 30% of the excess income, but not below a $10,000 minimum. The highest-income taxpayers can deduct up to $10,000 in SALT. The phasedown threshold increases by 1% annually through 2029. The SALT deduction cap will revert to the $10,000 limit established under the TCJA in 2030, without any income-based phase-out.
Taxpayers are still only able to claim the SALT deduction if they itemize deductions on their tax return. For a small number of taxpayers, SALT is affected by the alternative minimum tax (AMT), but due to the phase-out of the $40,000 cap, the effect of the AMT on SALT deduction will likely be limited.
Taxpayers living in states with high state income tax rate, such as California, Connecticut, and New York will benefit the most from the increased SALT deduction cap. Since the TCJA, the SALT cap coupled with an increased standard deduction has primarily made itemized deductions valuable only to higher-earning households. While the higher $40,000 cap will convince some upper-middle-income households to itemize from 2025 through 2029, the benefits of SALT deduction will still mostly accrue to the high earners. Low- and middle-income households are generally not paying $20,000, $30,000, or $40,000 in state income taxes and local property taxes. Although sales taxes are still deductible, they are likely to remain a small portion of overall SALT deduction.
Qualified Business Income Deduction Stays
The qualified business income (QBI) deduction, introduced under the 2017 Tax Cuts and Jobs Act (“TCJA”), has been a significant tax benefit for many business owners. It allows eligible taxpayers to deduct up to 20% of their QBI, not to exceed 20% of taxable income.
QBI generally refers to the net amount of qualified income, gain, deduction, and loss from a qualified U.S. trade or business. Taxpayers eligible for the deduction include sole proprietors and owners of pass-through entities such as partnerships, S corporations, and LLCs. C corporations are not eligible for the QBI deduction.
Beginning in 2026, the One Big Beautiful Bill Act (“OBBBA”) makes the QBI deduction permanent and increases the deduction rate from 20% to 23%. The phase-out range for the QBI deduction has been expanded to $75,000 for individuals and $150,000 for married couples filing jointly, compared to the previous $50,000 and $100,000. The threshold amounts will be annually adjusted for inflation after 2026. The expanded ranges allow more high-income taxpayers to benefit from the deduction before it phases out, especially those in specified service trades or businesses (SSTBs) such as law, health, consulting, and performing arts.
The OBBBA also provides a new minimum QBI deduction of $400 for taxpayers who materially participate in an active trade or business and have at least $1,000 of QBI from that business. The minimum deduction will also be annually adjusted for inflation after 2026.
Under the TCJA, businesses considered forming a C corporation or converting to C corporation status to take advantage of the 21% flat corporate tax rate. With the enhanced QBI deduction under the OBBBA, pass-through entities may now offer more favorable tax treatment. Taxpayers should carefully compare the implications of operating as a pass-through entity versus C corporation, while also considering factors such as double taxation under C corp status, built-in gains tax when converting to C corp status, marginal tax bracket as an individual, and state and local tax limitations.