House Republican budget bill calls for bigger 'pass-through' business tax break. Who could benefit

Senate Republicans are set to consider House-approved tax breaks, including an expansion and permanency of the Section 199A deduction for qualified business income (QBI). The "One Big Beautiful Bill Act" would increase the maximum QBI deduction from 20% to 23% starting in 2026, benefiting pass-through businesses, including small business owners and gig workers; however, analysts note that the proposed changes primarily favor higher-income earners and specified service trade or business (SSTB) owners, such as lawyers and financial advisors, due to altered phaseout calculations.

Analysis

Senate Republicans are set to deliberate on the House-approved "One Big Beautiful Bill Act," which proposes to make permanent and expand the Section 199A Qualified Business Income (QBI) deduction. Currently offering up to 20% off eligible revenue for pass-through entities and set to expire after 2025, the bill would increase this to 23% from 2026 and alter phase-out calculations. This deduction, utilized by approximately 25.6 million claimants in 2022 (up from 18.7 million in 2018), applies to partnerships, S-corporations, sole proprietors, freelancers, and gig workers. Financial analysts, including Ben Henry-Moreland and Chye-Ching Huang, indicate that while a higher deduction could offer some general benefit, the proposed changes to phase-out rules would primarily advantage higher-income owners of "specified service trade or business" (SSTB) entities, such as legal and financial professionals. This aligns with criticism from experts like Erica York of the Tax Foundation, who note the existing QBI deduction already disproportionately benefits affluent business owners over salaried employees, a trend the proposed enhancements could exacerbate.

Key Decisions for Investors

• Investors should closely monitor the legislative progression of the "One Big Beautiful Bill Act," as its enactment could materially impact the after-tax profitability and valuation of pass-through businesses, particularly those in SSTB sectors with high-income owners.
• Consider re-evaluating tax planning strategies for investments in or by pass-through entities, as a permanent and increased QBI deduction would offer long-term certainty and potentially significant tax savings for eligible taxpayers.
• Assess potential shifts in investment attractiveness towards sectors dominated by pass-through entities or those servicing high-income individuals, should the bill pass and lead to increased disposable income for these business owners.