Introduction
The Qualified Business Income (QBI) deduction—also called the 20% pass-through deduction—has been a game-changer for California owners of LLCs, S‑corporations, sole proprietorships, and partnerships. But with Senate discussions about sunsetting or reducing it in late 2025, planning ahead is critical. This guide shows how to maximize this deduction, structured specifically for Greater Los Angeles businesses.
1. Who Qualifies—and Who Doesn’t
- Eligible Entities: The QBI deduction is available to pass-through entities: S-Corps, partnerships, LLCs, or sole proprietorships.
- Income Thresholds for 2025: For joint filers, the deduction begins to phase out at $364,200 and fully phases out by $514,200. Single filers see phase-outs between $182,100 and $232,100.
- Specified Service Trade or Business (SSTB): If your firm provides professional services—like consulting, law, or financial planning—your eligibility may be limited if your income exceeds those thresholds.
2. Choosing the Ideal Business Entity
- Why Structure Matters: Only active business profits qualify. Passive income is excluded.
- LLC vs. S‑Corp Strategy: Switching to an S‑corporation allows you to split owner compensation between salary (W-2 wages) and distributions. Since only distributions generate QBI, this could yield significant tax savings—as long as your salary meets IRS “reasonable compensation” rules.
- Partnerships and Sole Proprietorships: These don’t provide a salary/distribution mechanism—wage-based strategies are therefore limited.
3. W-2 Wages & Qualified Property
- W-2 Wages Requirement: To maximize the deduction, your QBI is limited depending on your wages paid or the basis in depreciable property.
- Asset-Based Advantage: Buying new business equipment (such as machines, vehicles, or computers) can increase your deduction via Section 179 write-offs—potentially raising your maximum QBI benefit.
4. Locking in the Deduction Before It Expires
| Strategy | Why It Matters |
| Year-end Planning | Lock your bracket and business entity structure before any sunset in late 2025. |
| Accelerate W‑2 Salary | Pre-December payroll runs smooth the QBI equation. |
| Use Section 179 Aggressively | Larger qualified deductions can dial QBI limits in your favor. |
| Revise Bylaws/Operating Agreements | Entity-specific paperwork should reflect new structures. |
| Monitor Legislative Updates | Even small extensions impact your strategy—but don’t wait. |
5. Estimated Payments & Avoiding Penalties
- Know the Dates: Estimated tax deadlines are April 15, June 15, September 15, and January 15.
- Avoid Underpayment: Plenty of California businesses get hit with 5% penalties if they underpay. Use projected QBI savings to reduce payments but not withhold penalties.
- Safe-Harbor Rules: Pay 90% of the current year or 100% of last year (110% if your AGI exceeds $150K).
Case Study: Local LA Owner
Tech-solutions firm owner “Maria S.” shifted her plumbing consulting LLC to an S‑Corp, doubling her QBI deduction from $25K to $52K by 2025—after factoring in payroll and new equipment purchases.
Conclusion
The QBI deduction remains one of the most powerful tax-saving opportunities for California small businesses. But given the possible legislative sunset in 2025, proactive planning is essential. Don’t wait until it’s too late!
Ready to optimize your setup and protect your profits? Schedule a free tax strategy session with Prudential Tax Advisory Group today to lock in your QBI benefits.
