Tax Law Update — May 2026
QBI Deduction Increase to 23%: What Small Business Owners Must Know in 2026
A proposed QBI deduction increase to 23% for small businesses in 2026 could be one of the most significant tax breaks to hit Main Street in years — and if you’re a sole proprietor, S-corporation owner, partner, or independent contractor, you need to understand exactly what’s on the table right now. On April 22, 2026, Rep. David Kustoff (R-TN), a member of the House Ways and Means Committee, introduced H.R. 8415 — the Small Business Tax Cut Act of 2026 — a bill that would raise the Section 199A qualified business income (QBI) deduction from its current 20% to 23%. That 3-percentage-point jump may sound modest, but for the millions of small business owners across the country, the real-dollar impact could be substantial.
In this post, the team at Catalyst CPA Corporation breaks down what H.R. 8415 proposes, who stands to benefit, how much money you could save, and what concrete steps to take right now while the bill works its way through Congress.
● Key Takeaways
- ✓
H.R. 8415, the Small Business Tax Cut Act of 2026, was introduced April 22, 2026, and would raise the Section 199A QBI deduction from 20% to 23%. - ✓
Eligible business owners include sole proprietors, S-corp shareholders, partners, freelancers, and qualifying real estate investors. - ✓
A business generating $300,000 in QBI could save an additional $2,160/year; at $500,000 QBI, nearly $4,800/year in added savings. - ✓
The bill is currently referred to the House Ways and Means Committee and may be attached to the GOP federal budget reconciliation package. - ✓
The One Big Beautiful Bill Act (OBBBA) already made the 20% QBI deduction permanent — H.R. 8415 would build on that foundation by increasing the rate. - ✓
As of May 2026, the QBI deduction rate is still 20% — proactive planning now positions you to capture full savings the moment the law changes.
What Is the QBI Deduction (Section 199A)?
The qualified business income (QBI) deduction — formally known as the Section 199A deduction — was created by the Tax Cuts and Jobs Act (TCJA) of 2017. It allows eligible owners of pass-through entities to deduct a percentage of their qualified business income from their taxable income before calculating federal income tax. For millions of small business owners, it has become one of the most powerful annual tax-reduction tools available — and the proposed QBI deduction increase to 23% in H.R. 8415 would make it even more valuable.
Pass-through entities that can claim this deduction include:
- Sole proprietorships (Schedule C filers)
- Partnerships (Form 1065)
- S-corporations (Form 1120-S)
- Single-member LLCs taxed as sole proprietors
- Rental real estate businesses meeting the trade or business definition
The deduction was originally set to expire after the 2025 tax year, but the One Big Beautiful Bill Act (OBBBA) made it permanent — a major victory for small business owners. Now, H.R. 8415 proposes to take it a step further by raising the deduction rate from 20% to 23% for tax years going forward. You can find related context and deeper analysis on our tax and accounting insights blog.
What Does H.R. 8415 Actually Propose?
Introduced on April 22, 2026, and immediately endorsed by the National Federation of Independent Business (NFIB) and the Small Business & Entrepreneurship (SBE) Council, H.R. 8415 — the Small Business Tax Cut Act of 2026 — would amend the Internal Revenue Code to accomplish one precise objective:
Increase the Section 199A QBI deduction rate from 20% to 23% for noncorporate small business owners.
Rep. Kustoff has stated publicly that he hopes the bill can be attached to the broader GOP federal budget reconciliation package currently circulating in Congress. The bill was referred to the House Committee on Ways and Means on April 21, 2026, and as of early May 2026, it remains in active consideration as part of the ongoing federal budget package debate.
In a statement to CNBC at the time of introduction, Rep. Kustoff said: “It benefits family farms” — underscoring that the reach of the proposed QBI deduction increase to 23% extends well beyond urban business owners to agricultural operations, rural entrepreneurs, and the broad spectrum of Main Street America.
The NFIB, representing 300,000+ small businesses, noted in its April 23 endorsement letter that the Section 199A deduction has already empowered 25.9 million small businesses to hire more employees, expand operations, and invest in local communities. Raising it to 23% builds on that foundation.
How Much Would the QBI Deduction Increase to 23% Actually Save You?
Let’s move from legislation to real numbers. The difference between a 20% and 23% QBI deduction translates directly into lower taxable income and lower federal tax bills. The examples below illustrate the small business tax savings in 2026 across three common income levels.
Example 1: Sole Proprietor with $150,000 QBI
| Scenario | QBI Deduction Rate | Deduction Amount | Taxable Income Reduction |
|---|---|---|---|
| Current Law (20%) | 20% | $30,000 | $30,000 |
| H.R. 8415 Proposed (23%) | 23% | $34,500 | $34,500 |
| Additional Benefit | +3% | +$4,500 | +$4,500 |
At a 22% marginal tax rate, that extra $4,500 deduction saves roughly $990 in federal taxes per year — real money that stays in your pocket or gets reinvested into your business.
Example 2: S-Corporation Owner with $300,000 QBI
| Scenario | QBI Deduction Rate | Deduction Amount | Additional Savings (24% bracket) |
|---|---|---|---|
| Current Law (20%) | 20% | $60,000 | — |
| H.R. 8415 Proposed (23%) | 23% | $69,000 | $2,160/year |
S-corporation owners leveraging our CPA services for QBI optimization stand to gain significantly from even a 3-point rate increase at this income level.
Example 3: Partnership with $500,000 QBI
| Scenario | QBI Deduction Rate | Deduction Amount | Additional Savings (32% bracket) |
|---|---|---|---|
| Current Law (20%) | 20% | $100,000 | — |
| H.R. 8415 Proposed (23%) | 23% | $115,000 | $4,800/year |
As these examples illustrate, the higher your qualified business income, the more meaningful the 3% increase becomes. For a business generating $500,000 in QBI, nearly $5,000 in additional annual tax savings would be on the table — money that could be reinvested into hiring, equipment, or retained earnings.
Importantly, one analysis of the proposal noted that if you’re in the 24% tax bracket and claim a 23% QBI deduction on your pass-through entity tax deduction, you effectively pay taxes on only 77% of your qualified business income — dropping your effective rate to approximately 18.5% on that portion of income. That kind of structural advantage is exactly why this proposed change matters so deeply to small business owners.
Who Qualifies for the QBI Deduction — and the Proposed Increase?
Not every business owner qualifies for the full QBI deduction eligibility threshold, and that won’t change under H.R. 8415. The proposal simply raises the deduction rate; the existing eligibility framework under Section 199A remains intact. Here is a concise overview of who’s in and who faces limitations.
Generally Eligible for the QBI Deduction
- Sole proprietors filing Schedule C
- Self-employed individuals and freelancers
- Partners in eligible partnerships
- S-corporation shareholders
- Real estate investors with qualifying rental activity
- Farmers and agricultural operations
Subject to Income-Based Phase-Outs: SSTB Owners
Specified Service Trade or Business (SSTB) owners — including those in health, law, consulting, financial services, and performing arts — face SSTB deduction phase-out 2026 limitations based on income. Under OBBBA, these thresholds were adjusted, but they still apply. Once your taxable income exceeds the phase-in range, your QBI deduction may be partially or fully limited regardless of the rate being 20% or 23%. For 2026, the phase-out thresholds for SSTBs are indexed for inflation — consult your CPA for your specific situation.
W-2 Wage and Capital Property Limitations
For higher-income non-SSTB filers, the Section 199A deduction 2026 may be limited by either:
- 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 property
These wage and property limitations would apply at the same income thresholds — just with a 23% ceiling instead of 20% if H.R. 8415 passes. Understanding these nuances is exactly why working with an experienced CPA is essential. If you’re serving Moreno Valley or surrounding communities, our local team can run through your specific numbers in detail.
Where Does H.R. 8415 Stand Right Now? (Legislative Status)
As of early May 2026, here is the complete legislative status of the Small Business Tax Cut Act and the proposed QBI deduction increase to 23%:
- April 21–22, 2026:
H.R. 8415 introduced in the House by Rep. David Kustoff (R-TN-8) - April 21, 2026:
Referred to the House Committee on Ways and Means - April 23, 2026:
NFIB formally endorses H.R. 8415, representing 300,000+ small businesses - April 23, 2026:
SBE Council formally endorses H.R. 8415 - May 2026:
Bill actively circulating in discussions around the GOP federal budget reconciliation package
The bill is currently in the first stage of the legislative process — it has been introduced and referred to committee, but has not yet received a committee vote, floor vote, or Senate action. The key pathway forward is inclusion in the broader Republican budget reconciliation package, which could allow it to pass with a simple Senate majority under budget reconciliation rules.
That said, nothing is guaranteed. Small business owners should plan for both scenarios: the deduction staying at 20% under current law, and the potential increase to 23% if H.R. 8415 advances. Proactive scenario modeling — something our team excels at — is the smartest approach in this legislative environment.
The Bigger Picture: QBI Deduction + OBBBA = A New Tax Landscape for Small Business
To fully appreciate the significance of the proposed QBI deduction increase to 23%, it helps to place it in the broader context of the One Big Beautiful Bill Act (OBBBA), which already made several favorable changes to the qualified business income deduction for 2026 and beyond:
- Permanence: The QBI deduction is now permanent — no more expiration cliffs or legislative uncertainty after 2025.
- Expanded access: More business types and income levels now qualify or face fewer restrictions under OBBBA.
- Inflation indexing: Phase-out thresholds are adjusted annually for inflation, protecting more small business owners over time.
H.R. 8415 would layer a rate increase from 20% to 23% on top of these already-favorable OBBBA changes, creating the most generous Section 199A deduction 2026 environment since the provision was first created in 2017. Think of OBBBA as locking in the foundation, and H.R. 8415 as proposing to build a more valuable structure on top of it. Learn about our expertise in navigating these evolving tax law changes for small business clients across Southern California.
5 Tax Planning Steps to Take Right Now (Even Before H.R. 8415 Passes)
Even though H.R. 8415 hasn’t been enacted yet, there are concrete actions small business owners and their CPAs should take today in preparation. Waiting until legislation is signed into law means lost time — and potentially lost savings.
Step 1: Know Your Current QBI Deduction Amount
Work with your CPA to calculate your 2025 QBI deduction and project your 2026 sole proprietor tax deduction 2026 or pass-through deduction under current law (20%). This creates your baseline so you can immediately quantify the benefit if the rate rises to 23%.
Step 2: Model the 23% QBI Deduction Increase Scenario
Run a side-by-side tax projection comparing 20% vs. 23% QBI deduction rates using your expected 2026 business income. This helps you understand the cash flow impact and potentially accelerate income into 2026 if the rate increase is retroactive to January 1, 2026.
Step 3: Maximize Your QBI-Eligible Income
Whether the rate stays at 20% or rises to 23%, strategies that maximize your qualified business income deduction — such as proper entity structuring, S-corp reasonable compensation optimization, and careful retirement plan contribution timing — will deliver greater value at a higher deduction rate.
Free Download · 2026 Edition
Real Estate Investor Tax Deduction Checklist
Every rental-property deduction category with its IRS source — depreciation, repairs vs. improvements, QBI, §1031, audit triggers. Compiled by Adham Abadier, CPA (CA License #158599).
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Step 4: Track W-2 Wages if You’re Near the Phase-Out
If your income is approaching the W-2 wage limitation thresholds, now is the time to evaluate payroll strategies. The higher the deduction rate, the more costly it becomes to inadvertently limit your S-corporation QBI deduction through inadequate W-2 wages. This is a nuance that frequently surprises growing business owners.
Step 5: Stay Informed — And Don’t Wait to Plan
The federal budget reconciliation tax package could move quickly in Congress. Your CPA should be actively monitoring this bill and any amendments. Proactive planning now means you’re positioned to act immediately — not scrambling — the moment H.R. 8415 becomes law. Bookmark our latest tax tips page for real-time legislative updates.
What the Proposed QBI Deduction Increase to 23% Means for Catalyst CPA Clients
At Catalyst CPA Corporation, we work closely with sole proprietors, S-corporation owners, partnerships, and self-employed professionals who rely on the qualified business income deduction as a cornerstone of their annual tax strategy. A potential QBI deduction increase to 23% in 2026 is not a background news item — it’s a planning opportunity that could directly affect your estimated tax payments, your year-end tax bill, and your long-term financial trajectory.
We’re actively monitoring H.R. 8415 and will update clients the moment there is material legislative movement. Whether you’re a Moreno Valley small business owner or operate across Southern California, this is precisely the kind of proactive, timely tax guidance that makes the difference between reacting to tax law and strategically leveraging it.
Want to See Your Personalized QBI Savings Projection?
Run the numbers on both 20% and 23% QBI deduction scenarios with your actual 2026 business income. Our CPAs will show you exactly what H.R. 8415 could mean for your federal tax bill — and how to position your business right now.
Frequently Asked Questions About the Proposed QBI Deduction Increase to 23%
Is the QBI deduction increase to 23% already in effect for 2026?
No. As of May 2026, the Section 199A deduction 2026 rate is still 20% under current law (as made permanent by OBBBA). The proposed increase to 23% is contained in H.R. 8415, which has been introduced in the House and referred to the Ways and Means Committee but has not yet been enacted into law.
When would the 23% QBI deduction rate take effect if H.R. 8415 passes?
The effective date would depend on the final bill language. It could apply retroactively to January 1, 2026, or prospectively from the date of enactment. This is a critical detail to monitor as the federal budget reconciliation tax package develops — and one of the key reasons to model both scenarios now rather than waiting.
Does the proposed QBI deduction increase apply to SSTBs?
H.R. 8415 proposes to raise the deduction rate for all eligible pass-through business owners. However, SSTB deduction phase-out 2026 rules still apply under Section 199A. Higher-income SSTB owners — in fields like health, law, consulting, and financial services — may still face partial or full deduction elimination above certain income thresholds, regardless of whether the rate is 20% or 23%.
How is H.R. 8415 different from the QBI changes already made by OBBBA?
The One Big Beautiful Bill Act QBI changes made the existing 20% deduction permanent and expanded access for more taxpayers. H.R. 8415 is a separate, standalone bill that would specifically raise the deduction rate itself from 20% to 23%. Think of OBBBA as locking in the foundation and H.R. 8415 as proposing to build a more generous structure on top of it.
Who endorsed H.R. 8415 — the Small Business Tax Cut Act of 2026?
The National Federation of Independent Business (NFIB), which represents over 300,000 small businesses nationwide, and the Small Business & Entrepreneurship (SBE) Council both formally endorsed H.R. 8415 on April 23, 2026 — the day after it was introduced. The NFIB’s endorsement letter specifically highlighted the deduction’s existing impact on 25.9 million small businesses and the additional benefit of expanding it via a QBI deduction increase to 23%.
Ready to Maximize Your QBI Deduction in 2026?
Whether H.R. 8415 passes or not, there are strategies available right now to optimize your Section 199A deduction, reduce your 2026 federal tax liability, and position your business for the most favorable outcome under either scenario.
The Catalyst CPA team is monitoring H.R. 8415 in real time and is ready to run your personalized tax projection today.
Legal & Tax Disclaimer
This blog post is intended for general informational and educational purposes only and does not constitute legal, tax, or financial advice. The information presented reflects the status of H.R. 8415 and related tax legislation as of early May 2026 and is subject to change as legislation evolves. Tax laws, regulations, and their application vary significantly based on individual circumstances. The examples and projections provided are illustrative only and should not be relied upon as a substitute for personalized professional guidance. Catalyst CPA Corporation makes no representations or warranties regarding the accuracy or completeness of this content. Please consult a qualified CPA or tax advisor regarding your specific situation before making any financial or tax-related decisions. IRS Circular 230 Notice: Nothing in this communication is intended to be used, and cannot be used, to avoid tax penalties.
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