NEWS
%20Deduction%20Rules%20Remain.webp)
The One Big Beautiful Bill, enacted in July 2025, permanently extended the qualified business income (QBI) deduction but left IRS documentation standards unchanged. Small business owners claiming the deduction must still maintain detailed records to substantiate income, wages, and property calculations under federal income tax rules.
The qualified business income deduction allows eligible owners of pass-through businesses to deduct up to 20% of their business profits earned from a qualified trade or business. The provision, codified in Section 199A of the tax code, was enacted as part of the 2017 tax cuts and was initially scheduled to expire after 2025.
By removing the sunset date, the One Big Beautiful Bill made the Section 199A deduction permanent. Lawmakers did not, however, revise the tax regulations governing eligibility or substantiation. As a result, taxpayers must continue demonstrating that pass-through income reported on a return meets statutory requirements.
The deduction does not apply to capital gains or other investment income and is limited by taxable income thresholds. Businesses exceeding those thresholds may face additional limits tied to wages paid or qualified property.
To claim the deduction, taxpayers must maintain records showing income derived from a trade or business. This includes documentation supporting business profits reported for federal income tax purposes, such as bank statements, invoices, and third-party reporting forms.
For higher-income filers, wage and guaranteed payments become a determining factor. The IRS routinely reviews payroll records during audits to verify that wages were paid and properly reported. Inadequate payroll documentation can result in a reduced deduction and increased tax liability.
When documentation fails to support amounts claimed, the IRS may assess an accuracy-related penalty under the tax code, even when errors are unintentional.
Property ownership can also affect the allowable deduction. For some taxpayers, limits are based on the unadjusted basis of qualified property used in the business, including equipment and other tangible assets placed in service.
To support these calculations, taxpayers must retain purchase records, depreciation schedules, and loan documentation. These records often must be preserved for multiple years, particularly when assets remain in use across tax periods.
Missing or inconsistent asset records can weaken a taxpayer’s position during an IRS examination.
Eligibility also depends on how a business is classified. A business considered a specified service trade or business may face stricter limits once income exceeds statutory thresholds. Misclassification or unsupported claims regarding business activities can trigger closer review.
The IRS has emphasized that taxpayers bear the burden of proof under tax laws. Claims that cannot be substantiated with records may be denied regardless of intent.
The following sources provide official guidance and statutory authority related to the qualified business income deduction, IRS recordkeeping requirements, and the legal framework governing Section 199A. These materials outline the documentation standards and compliance obligations applicable under federal tax law.
Accurate recordkeeping remains central to claiming deductions under the tax code. As the qualified business income deduction remains in effect permanently, maintaining records that align with IRS guidance and statutory requirements remains essential for compliance and audit defense.
By William Mc Lee, Editor-in-Chief & Tax Expert—Get Tax Relief Now
© 2025 Get Tax Relief Now™. All rights reserved.
