Qualified Business Income Deduction & Qualified Tips

What Business Owners, Creators, and High-Income Earners Need to Know for 2025–2026

Recent federal legislation under the One, Big, Beautiful Bill Act (OBBBA) made important changes to two major provisions affecting business owners and workers:

1. The IRC §199A Qualified Business Income (QBI) deduction
2. The new Qualified Tips deduction

At Velin & Associates, Inc., CPA Los Angeles, we are actively advising doctors, dental practices, e-commerce entrepreneurs, creators, filmmakers, and high-net-worth individuals on how these rules impact their tax strategy.

Below is a detailed breakdown — with real-world examples relevant to our Los Angeles client base.

Part I: The Qualified Business Income (QBI) Deduction Is Now Permanent

The 20% QBI deduction under IRC §199A was originally scheduled to expire. OBBBA makes it permanent, with several modifications beginning in 2026.

What Is the QBI Deduction?

Eligible taxpayers may deduct up to 20% of qualified business income from pass-through entities, including:

• S-Corporations
• Partnerships
• Sole proprietorships (Schedule C)
• Certain trusts and estates

The deduction equals 20% of the lesser of:

• Qualified Business Income (QBI), or
  • Taxable income (before the §199A deduction and after reduction for net capital gains)

Important 2026 Change: Larger Phaseout Ranges

Beginning in 2026, the phaseout ranges increase:

This expansion benefits many professionals whose income previously pushed them out of eligibility.

Why This Matters for Our Clients

Example 1: Medical Practice Owner (SSTB)

A Los Angeles physician earning $450,000 through an S-Corp falls within the new 2026 expanded phaseout range.

Because medical practices are considered Specified Service Trade or Businesses (SSTBs):

• The QBI deduction may be partially reduced.
• However, the larger phaseout window allows more planning flexibility.

We often structure:

• Reasonable compensation levels
• Retirement contributions
• Income timing strategies

to preserve as much of the 20% deduction as legally possible.

Example 2: Shopify Store Owner

An online commerce client earning $300,000 in net business income:

• Not an SSTB
• Pays W-2 wages
• Owns inventory and depreciable assets

They may qualify for the full 20% deduction — a potential $60,000 federal deduction.

However:

✔ W-2 wage limits may apply
✔ Asset basis rules may apply
✔ State impact differs

California Nonconformity

California does not conform to IRC §199A.

That means:

• The 20% deduction reduces federal taxable income
  • There is no corresponding California deduction

This creates federal-state tax planning mismatches — especially for high earners in Los Angeles.

New Minimum QBI Deduction

OBBBA introduces a minimum deduction of $400 for taxpayers with at least $1,000 of QBI from active businesses where they materially participate.

While modest, this ensures small business owners receive at least some benefit.

Part II: New Qualified Tips Deduction (2025–2028)

The media calls this “no tax on tips.”
That is misleading.

This is not an exclusion — it is a below-the-line deduction, meaning:

• Tips are still taxable income
  • Tips are still subject to Social Security and Medicare taxes

The maximum deduction is $25,000 per year (2025–2028).

Who Qualifies?

Qualified tips must:

✔ Be voluntary
✔ Be cash or electronic payments (credit cards, Venmo, etc.)
✔ Be reported on W-2, 1099, or Form 4137
✔ Be earned in traditionally tipped occupations
✔ Not be earned in a Specified Service Trade or Business

Important: Service Charges Are NOT Tips

Mandatory gratuities or automatic service charges do not qualify.

Example: Restaurant POS Device

If a customer is given the option:

15% | 18% | 20% | Other | No tip

The chosen amount qualifies.

If the customer must choose between:

15% | 18% | 20%

Then only the portion above the lowest option qualifies.

Self-Employed Tip Income: Complex Area

Self-employed taxpayers may claim the deduction only if:

• Tips are reported on 1099 forms
  • The business is NOT an SSTB

This raises planning questions for:

• Freelancers
• Beauty professionals
• Creators with tipping income

Example: Dog Groomer

Kat opens a grooming business:

• Gross income: $100,000
• Tips: $20,000
• Expenses: $85,000

Net income = $15,000

Her tip deduction is limited to $15,000, not $20,000.

Phaseout for High-Income Earners

The deduction phases out when modified AGI exceeds:

• $150,000 (Single)
  • $300,000 (MFJ)

Fully phased out at:

• $400,000 (Single)
  • $550,000 (MFJ)

Example: Actress with Side Waitressing Income

Stella earns $10,000 in tips early in the year.

Her modified AGI ends at $175,000.

She must reduce her deduction by $2,500.

Allowed deduction: $7,500

Important Interaction With QBI

Claiming the qualified tips deduction reduces QBI from that same business.

This can reduce your §199A deduction.

For high-income entrepreneurs, this interaction must be modeled carefully.

Strategic Planning for Our Los Angeles Clients

These rules affect:

• CPA for Doctors
  • CPA for Dental Practice
  • CPA for Shopify Store
  • CPA for Creators
  • CPA for Filmmakers
  • CPA for Amazon Business
  • CPA for High Net Worth Individuals

Planning areas include:

✔ S-Corp compensation strategies
✔ Managing SSTB phaseouts
✔ Tip reporting compliance
✔ Withholding adjustments
✔ Multi-state tax considerations
✔ California vs federal planning mismatches

The Bottom Line

The 20% QBI deduction is now permanent — but increasingly complex.

The new qualified tips deduction offers opportunity — but comes with technical rules, income phaseouts, and reporting requirements.

Without proactive planning, taxpayers risk:

• Overstating deductions
  • Losing eligibility
  • Triggering audits
  • Missing optimization opportunities

Work With Professionals Who Understand Both Law and Strategy

At Velin & Associates, Inc., CPA Los Angeles, we go beyond form filing.

We integrate:

• Business structuring
  • Compensation planning
  • Federal and California coordination
  • Audit risk management
  • Long-term wealth strategy

For more information about our tax planning services, contact us today: visit our website.

Velin & Associates, Inc

8159 Santa Monica Blvd STE 198/200 West Hollywood, CA 90046
323-902-1000
dmitriy@losangelescpa.org

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