Introduction
Attorneys and law firm owners often contend with intricate tax landscapes, where pass-through income from partnerships or S corporations can lead to substantial tax liabilities if not optimized effectively. Inexperienced tax preparers may overlook the nuances of the Qualified Business Income (QBI) deduction under Internal Revenue Code (IRC) § 199A, particularly with its impending expiration after 2025 potentially causing uncertainty and increased taxes.
However, the One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, has made the QBI deduction permanent, ensuring its availability beyond 2025 and introducing enhancements that broaden accessibility. Are you positioned to leverage these changes for maximum benefit?
At Kewal Krishan & Co, our expert tax advisors assist attorneys in saving an average of $50,000 annually, which could accumulate to $1 million over a decade through precise QBI strategies. This blog elucidates the reinstated and updated QBI deduction for 2025, with IRC references, tailored examples for legal professionals, and compliance steps. As a specified service trade or business (SSTB), law practices face phase-outs, but expanded thresholds under OBBBA offer new opportunities. Secure your firm’s financial advantage by implementing these insights, linked to Our Tax Planning Services.
Understanding the QBI Deduction and 2025 Updates
The QBI deduction, enacted under IRC § 199A, allows non-corporate taxpayers—such as sole proprietors, partners, and S corporation shareholders—to deduct up to 20% of qualified business income from domestic trades or businesses, plus 20% of qualified REIT dividends and publicly traded partnership income. This deduction is limited to the lesser of 20% of QBI or 20% of taxable income minus net capital gains.
For 2025, OBBBA eliminates the sunset provision, making the deduction permanent. Key enhancements include:
- Expanded Phase-In Thresholds: The income range for wage/property limitations and SSTB exclusions increases to $75,000 for single filers and $150,000 for joint filers (from $50,000/$100,000), indexed for inflation after 2026.
- New Minimum Deduction: A $400 minimum (indexed after 2026) applies if aggregate QBI is at least $1,000 and the taxpayer materially participates under IRC § 469.
- SSTB Considerations: Legal services qualify as an SSTB, subjecting the deduction to phase-out above thresholds. However, higher limits allow more attorneys to claim partial or full benefits.
The deduction is claimed on Form 8995 (simplified) or Form 8995-A (detailed), attached to Form 1040. It remains available regardless of itemizing deductions. For details, consult IRS Publication 535.
Key Limitations for Attorneys
- Wage and Property Tests: Above thresholds, the deduction is limited to the greater of 50% of W-2 wages or 25% of wages plus 2.5% of unadjusted basis of qualified property.
- Phase-Out for SSTBs: Fully phases out at $275,000 single/$550,000 joint (adjusted from prior levels due to expanded range).
Detailed Example: Maximizing QBI for Attorneys
Consider Sarah, a partner in a law firm (SSTB) with $300,000 in QBI for 2025, filing jointly with $350,000 total taxable income (no capital gains). The firm pays $100,000 in W-2 wages allocable to Sarah and has $200,000 in qualified property basis.
Under pre-OBBBA thresholds ($100,000 joint phase-in), Sarah’s deduction would phase out significantly. With OBBBA’s $150,000 threshold, phase-out begins but is less severe (full phase-out at $550,000).
QBI deduction: Lesser of $60,000 (20% of $300,000) or $70,000 (20% of $350,000) = $60,000.
Apply limitations: Wage limit = $50,000 (50% of $100,000); Property limit = $30,000 (25% wages + 2.5% basis = $25,000 + $5,000).
Greater limitation: $50,000, phased in over $400,000 range ($150,000 to $550,000). At $350,000 income, 50% phased out: Deduction = $30,000.
Tax savings at 37% bracket: $11,100. If minimum applies (QBI > $1,000, material participation): At least $400, but regular calculation exceeds.
Without OBBBA, tighter thresholds could reduce to $20,000, saving only $7,400—$3,700 less.
Alternative Scenario
For a solo attorney with $120,000 QBI (below $150,000 threshold): Full $24,000 deduction (20%), saving $8,880 at 37%—unaffected by limitations.
Step-by-Step Guide for Taxpayer Compliance
To claim the QBI deduction and comply with IRS rules for 2025, attorneys should follow these steps:
- Determine Eligibility: Confirm business is a qualified trade (non-employee) and calculate QBI per IRC § 199A(c) (gross receipts minus COGS, expenses).
- Assess SSTB Status: Verify legal services classification; aggregate multiple businesses if common ownership.
- Gather Data: Collect W-2 wages, unadjusted basis immediately after acquisition (UBIA), and REIT/PTP income.
- Apply Thresholds: Use $75,000 single/$150,000 joint; compute phase-out percentage if exceeded.
- Calculate Deduction: Use Form 8995 for simple cases or 8995-A for complex; include minimum if applicable.
- File Returns: Attach to Form 1040 by April 15, 2026, or extend with Form 4868; report on entity K-1s.
- Retain Records: Maintain wage statements, basis schedules, and participation logs for three years per IRC § 6001.
- Review Annually: Adjust for indexed thresholds and OBBBA changes.
For law firms with international clients, explore Our Cross-Border Tax Services.
Common Pitfalls to Avoid
- Miscalculating QBI: Exclude foreign income or investment returns; adhere to IRC § 199A(c).
- Ignoring Aggregation: Fail to aggregate trades under common control, missing wage/property benefits (IRC § 199A(f)(4)).
- Overlooking Material Participation: Required for minimum deduction; document under IRC § 469.
- State Conformity Issues: Some states (e.g., CA) do not conform; verify local rules.
Why Work with a Tax Expert?
The QBI deduction’s complexities, amplified by OBBBA’s permanence and threshold expansions, require specialized knowledge to avoid underclaiming or IRS scrutiny. Generic preparers may misapply SSTB phase-outs, forfeiting deductions for attorneys. Kewal Krishan & Co delivers tailored computations under IRC § 199A, integrating with entity choices to optimize benefits. Our expertise mitigates risks, as demonstrated in Our Tax Litigation Services.
Conclusion
The QBI deduction’s permanence under OBBBA ensures enduring tax relief for attorneys in 2025 and beyond, with expanded thresholds alleviating SSTB phase-outs and a new minimum enhancing accessibility. By accurately calculating and documenting, law professionals can significantly reduce liabilities. Vigilant compliance is imperative to harness these advantages—assess your firm’s position promptly to capitalize on this reinstated provision.
Call to Action
Schedule a consultation with Anshul Goyal, CPA EA FCA, a licensed U.S. CPA and Enrolled Agent, admitted to practice before the IRS, specializing in tax litigation and cross-border tax for U.S. businesses and Indians in the U.S. Contact us at Kewal Krishan & Co to optimize your QBI deduction.
About Our CPA
Anshul Goyal, CPA EA FCA, is a licensed U.S. CPA and Enrolled Agent, representing clients in IRS tax litigation and assisting with cross-border tax compliance for U.S. businesses and Indians in the U.S. His expertise ensures tailored strategies that maximize savings and ensure compliance.
Disclaimer
This blog provides general information for educational purposes only and does not constitute tax, legal, or financial advice. Tax laws change frequently, and individual circumstances vary. Consult a qualified tax professional before making decisions. The author and firm disclaim liability for actions taken based on this content.
FAQs
1. What is the QBI deduction?
Up to 20% of qualified business income for pass-through owners under IRC § 199A.
2. How does OBBBA affect QBI?
Makes it permanent, expands phase-in thresholds to $75k single/$150k joint, adds $400 minimum.
3. Are attorneys eligible?
Yes, but as SSTB, deduction phases out above thresholds.
4. What forms are used?
Form 8995 or 8995-A attached to Form 1040.
5. What’s the minimum deduction?
$400 if QBI ≥ $1,000 with material participation.