Small Business Deduction Increase to 23%: Tax Savings Guide

The landscape for pass-through entity taxation is shifting again, and this time the change could put significant money back into the pockets of small business owners across America. The proposed Small Business Tax Cut Act of 2026 (H.R. 8415) would increase the Section 199A qualified business income deduction from 20% to 23%—a seemingly modest adjustment that carries substantial implications for sole proprietors, partnerships, S-corporations, and the CPAs who advise them.

For accounting professionals managing client portfolios heavy with pass-through entities, understanding this potential change isn’t optional—it’s essential for providing the strategic guidance your clients expect. With the NFIB formally endorsing the legislation on April 23, 2026, momentum is building, and now is the time to prepare.

What the Small Business Tax Cut Act Means: 199A Deduction Increase Explained

The Section 199A deduction, introduced under the Tax Cuts and Jobs Act of 2017, allows owners of pass-through entities to deduct up to 20% of their qualified business income (QBI) from their taxable income. This provision was designed to provide parity between pass-through businesses and C corporations, which benefited from a reduced 21% corporate tax rate.

H.R. 8415 proposes taking this benefit further by increasing the deduction percentage to 23%. While three percentage points may seem incremental, the cumulative effect across millions of small businesses represents a substantial shift in after-tax cash flow. According to Treasury Department data, the existing 20% deduction has already reduced taxes for over 12 million small business owners by approximately $7,000 on average annually.

The Legislative Context

This proposed increase doesn’t exist in isolation. It builds directly on the Working Families Tax Cuts, which President Trump signed into law on July 4, 2025. That legislation made the 20% deduction permanent—a critical development, since the original provision was set to expire after 2025. Without that extension, 26 million small businesses would have faced their top tax rate effectively doubling to 43%.

The permanence of the base deduction is projected to generate $750 billion in economic growth and create over 1 million new Main Street jobs. The proposed increase to 23% would amplify these effects, narrowing the effective tax-rate gap between pass-through entities and larger C corporations even further.

How the 23% Deduction Would Work

The mechanics of the deduction would remain fundamentally similar to current law. Eligible taxpayers would calculate their qualified business income, apply the relevant limitations (W-2 wage limits, qualified property limits, or taxable income limits), and then deduct 23% of the qualifying amount rather than 20%.

For a business owner with $200,000 in qualified business income, the difference between a 20% and 23% deduction amounts to $6,000 in additional deductible income annually. At a 32% marginal tax rate, that translates to roughly $1,920 in additional tax savings per year—meaningful capital that can be reinvested in operations, hiring, or equipment.

Who Benefits Most: Pass-Through Entities and QBI Calculation Changes

For more background, see our earlier piece: 2026 Tax Law Changes Small Business Prep Checklist.

Not all businesses will experience the same impact from this proposed change. Understanding which clients stand to gain the most allows CPAs to prioritize advisory conversations and proactive planning.

Eligible Entity Types

The Section 199A deduction applies to income from:

• Sole proprietorships (Schedule C filers)
• Partnerships (including LLCs taxed as partnerships)
• S-corporations
• Farms and agricultural operations
• Family-owned businesses
• Trusts and estates with qualifying business income

Notably, the legislation includes provisions to expand eligibility beyond current parameters. While specific details on newly qualifying businesses haven’t been fully disclosed, the stated intent is to create a “smoother, more predictable structure as businesses grow” and eliminate the “benefit cliff” that currently penalizes businesses as they cross income thresholds.

The SSTB Challenge

Specified service trades or businesses (SSTBs)—which include fields like law, accounting, consulting, financial services, and health—face additional limitations under current law. Once an SSTB owner’s taxable income exceeds certain thresholds, the deduction phases out entirely.

The proposed modernization of income thresholds could provide meaningful relief here. Currently, many accounting firms and medical practices find themselves in an awkward middle ground: successful enough to trigger phase-outs but not large enough to justify restructuring as C corporations. Expanded thresholds would allow more of these businesses to capture the full 23% benefit.

Calculating the Enhanced Benefit

For tax preparers working with cloud-hosted tax software, running comparison scenarios will be essential once final legislation parameters are known. The calculation follows this general framework:

1. Determine the taxpayer’s qualified business income from each pass-through entity
2. Apply the W-2 wage limitation (50% of W-2 wages, or 25% of wages plus 2.5% of unadjusted basis immediately after acquisition of qualified property)
3. Calculate the tentative deduction at 23% of QBI
4. Apply the taxable income limitation (23% of taxable income minus net capital gains)
5. Take the lesser of the QBI-based calculation or the taxable income limitation

For businesses below the income threshold where limitations kick in, the calculation remains straightforward: simply multiply QBI by 23%. The complexity arises for higher-income taxpayers navigating the wage and property limitations.

Retroactive vs Prospective Planning: Timing Your Business Decisions

One of the most common questions from small business owners centers on timing: should they wait to see if the legislation passes, or take action now? The answer depends on the nature of the decision and its reversibility.

Decisions That Can Wait

Certain planning strategies can be implemented relatively quickly once legislative certainty exists:

• Adjusting reasonable compensation for S-corporation shareholders
• Timing discretionary income recognition
• Accelerating or deferring certain deductible expenses
• Making qualified property acquisitions (especially given the restored 100% bonus depreciation for assets acquired after January 19, 2025)

These tactical moves can typically be executed within a tax year once the rules are finalized. For clients in this category, the appropriate advice is often to maintain flexibility and prepare multiple scenarios.

Decisions That Require Lead Time

Other structural decisions take months to implement properly and shouldn’t be rushed regardless of pending legislation:

• Entity type conversions (sole proprietorship to S-corp, for example)
• Restructuring multi-entity business arrangements
• Implementing retirement plans that affect W-2 wages
• Hiring decisions that impact the wage limitation calculation

For these longer-horizon decisions, the 23% deduction should be one factor among many—not the sole driver. A business shouldn’t convert to an S-corporation purely to maximize a deduction that may or may not pass in its current form.

The Section 179 and Bonus Depreciation Interaction

When advising clients on timing, don’t overlook how the QBI deduction interacts with other recent changes. The Section 179 expensing limit increased to $2.5 million with a phase-out threshold of $4 million effective January 1, 2025, with inflation adjustments beginning in 2026. Additionally, 100% bonus depreciation was restored and made permanent for eligible assets acquired after January 19, 2025.

These provisions can significantly reduce taxable income in the year of acquisition—which in turn affects the QBI deduction calculation. Strategic timing of equipment purchases and capital improvements requires modeling both the immediate depreciation benefit and the downstream QBI impact.

Entity Structure Optimization: S-Corp vs LLC vs Sole Proprietor Under 23% Rule

The proposed increase to 23% doesn’t fundamentally change the entity structure analysis, but it does shift the math at the margins. For CPAs advising clients on optimal business structures, here’s how to think through the key considerations.

Sole Proprietorship Considerations

Sole proprietors enjoy the simplest structure and lowest compliance costs. Under a 23% QBI deduction, a sole proprietor with $150,000 in net business income would deduct $34,500 from taxable income (assuming no limitations apply)—up from $30,000 under the current 20% rate.

However, sole proprietors face the full weight of self-employment taxes on their entire net earnings. The QBI deduction doesn’t reduce self-employment tax liability. For higher-earning sole proprietors, the self-employment tax burden often outweighs the simplicity benefits.

S-Corporation Optimization

S-corporations allow owners to split income between reasonable compensation (subject to payroll taxes) and distributions (not subject to payroll taxes). This structure can generate significant tax savings—but it also affects the QBI deduction calculation.

The W-2 wage limitation becomes particularly relevant for S-corporations. If an S-corp pays minimal wages to maximize payroll tax savings, it may inadvertently limit the QBI deduction. Finding the optimal balance requires careful modeling.

The LLC Flexibility Advantage

LLCs offer structural flexibility that becomes increasingly valuable in uncertain legislative environments. A single-member LLC can elect S-corporation treatment if the math favors it, or revert to disregarded entity status if circumstances change. This optionality has real value when tax rules are in flux.

For accounting professionals helping clients evaluate these structures, having access to reliable cloud-hosted QuickBooks environments enables quick scenario modeling across different entity configurations—essential when clients need answers before the next estimated tax payment deadline.

What This Means for Your Practice

For CPAs and tax preparers, the proposed 23% deduction creates both challenges and opportunities. The challenge lies in managing client expectations during legislative uncertainty. The opportunity lies in demonstrating proactive advisory value.

Clients who receive a call from their accountant explaining what the proposed change means for their specific situation—before they read about it in the news—develop deeper trust and loyalty. This is the kind of advisory work that differentiates a strategic partner from a compliance-focused preparer.

From a workflow perspective, firms should begin building scenario templates now. When the legislation either passes or fails, you’ll want to communicate quickly and specifically to affected clients. Having the analysis framework ready means you can plug in final numbers and deliver personalized guidance within days rather than weeks.

The accounting professionals we work with at Sagenext have found that cloud-based environments make this kind of rapid response possible. When your tax software and client data are accessible from anywhere, you can run scenarios during a client call rather than promising to “get back to them next week.”

Action Steps for CPAs and Small Business Owners: Preparing for the Potential Change

Whether the 23% deduction passes in its current form, gets modified, or stalls in Congress, the following action steps position both advisors and business owners for optimal outcomes.

For CPAs and Tax Preparers

1. Identify clients with significant pass-through income who would benefit most from the increased deduction
2. Review current entity structures for optimization opportunities regardless of the legislation’s fate
3. Model the W-2 wage limitation impact for S-corporation clients at both 20% and 23% rates
4. Prepare client communication templates explaining the proposed change in plain language
5. Schedule proactive advisory conversations with top pass-through entity clients
6. Document SSTB status for all applicable clients and monitor threshold changes

For Small Business Owners

1. Request a QBI deduction analysis from your tax advisor showing current and proposed benefit levels
2. Review your entity structure with your CPA to ensure it remains optimal
3. Evaluate whether your current compensation structure (for S-corps) maximizes the deduction
4. Consider timing of major equipment purchases in light of Section 179 and bonus depreciation interactions
5. Maintain flexibility in year-end planning until legislative certainty emerges

Documentation and Compliance Preparation

Regardless of the final deduction percentage, maintaining proper documentation remains essential. The IRS guidance on the qualified business income deduction outlines the substantiation requirements that apply at any deduction level. Key documentation includes:

• Detailed records of qualified business income by entity
• W-2 wage totals for businesses subject to the wage limitation
• Unadjusted basis records for qualified property
• SSTB classification analysis and supporting rationale
• Aggregation elections (if applicable) and supporting documentation

Frequently Asked Questions

What is the current status of H.R. 8415, the Small Business Tax Cut Act?

As of late April 2026, H.R. 8415 is under consideration in Congress. The NFIB formally endorsed the legislation on April 23, 2026, signaling strong support from the small business advocacy community. However, no final vote has occurred, and the bill could still be modified before passage.

How much additional tax savings would the 23% deduction provide compared to 20%?

The additional savings depend on your qualified business income level and applicable limitations. For a business owner with $200,000 in QBI and no limitations, the increase from 20% to 23% would add $6,000 in deductible income. At a 32% marginal rate, that equals approximately $1,920 in additional annual tax savings.

Would the 23% deduction apply to 2026 tax returns?

The effective date depends on the final legislation. If passed, the bill could apply retroactively to the 2026 tax year or prospectively to future years. Tax preparers should monitor legislative developments closely and avoid making assumptions about timing until the bill is enacted.

Does the proposed legislation change who qualifies for the QBI deduction?

Yes. H.R. 8415 includes provisions to expand eligibility and modernize income thresholds. The stated goal is to eliminate the “benefit cliff” under current law, creating a smoother structure as businesses grow. Specific threshold amounts haven’t been publicly disclosed.

How does this affect specified service trades or businesses (SSTBs)?

SSTBs—including accounting, law, consulting, and healthcare practices—face phase-out limitations under current law. The proposed threshold modernization could allow more SSTB owners to claim the full deduction, though specific new thresholds haven’t been released.

Should I change my business entity structure based on this proposed legislation?

Entity structure decisions should never be based solely on pending legislation. The 23% deduction is one factor among many, including self-employment tax treatment, liability protection, administrative complexity, and state tax implications. Consult with your tax advisor before making structural changes.

Conclusion: Positioning for Success Regardless of Outcome

The proposed increase of the Section 199A deduction to 23% represents a meaningful opportunity for small business owners and the professionals who advise them. With 9 in 10 small businesses potentially benefiting from this legislation, the stakes are significant.

Yet the most valuable approach isn’t waiting passively for Congress to act. It’s using this moment to review entity structures, optimize compensation arrangements, and ensure documentation practices meet current requirements. These steps create value whether the deduction stays at 20% or increases to 23%.

For accounting firms managing multiple pass-through entity clients, having the right technology infrastructure makes proactive advisory work possible. When you can access client data, run scenarios, and communicate findings from anywhere, you transform from a year-end compliance provider into a year-round strategic partner.

Ready to see how cloud-hosted accounting and tax software can streamline your practice? and experience the flexibility that thousands of accounting professionals already rely on for responsive client service.