Making QBI (199A) Eligibility Easy to Understand for MSPs After the New Trump Tax Law

The Qualified Business Income (QBI) deduction has been one of the most valuable and misunderstood tax benefits available to MSP owners since it was introduced under the Tax Cuts and Jobs Act at the end of 2017. It allows eligible business owners to deduct up to 20% of qualified income, significantly reducing effective tax rates without changing how the business operates.

For MSPs and other recurring-revenue service businesses, the QBI deduction is less about eligibility and more about execution. Whether an MSP can benefit from QBI depends on taxable income levels, entity structure, and how owner compensation and reinvestment are managed year to year.

Because most MSPs are classified as specified service businesses (SSTB), eligibility depends heavily on income levels, entity structure, and how compensation and reinvestment are handled. As MSPs grow, hire, and reinvest in technology, it becomes easier to accidentally phase out of the deduction, even when profitability hasn’t fundamentally changed.

In other words, MSPs can still claim the QBI deduction under the OBBBA, but only if their structure, income, and planning support it.

The QBI deduction, formally known as Section 199A, allows eligible owners of pass-through businesses to deduct up to 20% of qualified business income, subject to income-based limitations.

How has the QBI Deduction Changed Under the OBBBA?

Since its introduction under the Tax Cuts and Jobs Act (TCJA), the Qualified Business Income (QBI) deduction came with an expiration date and a fair amount of uncertainty. For example, many MSP owners delayed changes to owner compensation or avoided long-term tax planning because the deduction was set to expire in 2025, making it risky to build multi-year strategies around a benefit that might disappear.

The One Big Beautiful Bill Act clarified the future of the QBI deduction and the planning framework MSPs must operate within. To see how this affects real-world decisions, it helps to compare how QBI worked before the OBBBA with what applies as MSPs plan for 2026.

QBI Before the Big Beautiful Bill

The QBI deduction allowed eligible pass-through owners to deduct up to 20% of qualified business income (Section 199A). For MSPs, who are generally classified as specified service trades or businesses (SSTBs), eligibility was highly income-sensitive. Once taxable income exceeded the annual Section 199A thresholds (roughly $191,950 for single filers and $383,900 for married filing jointly in 2024), the deduction began to phase out entirely. For growing MSPs reinvesting in payroll, technology, or uneven profitability, this made the deduction unpredictable from year to year.

Phase-outs often penalized growth: a strong sales year, a large client onboarding, or a one-time gain could unintentionally eliminate the QBI deduction, leaving owners frustrated despite stable business performance. Planning around QBI was largely reactive. Decisions about owner W‑2 compensation, reinvestment, or accelerated depreciation (Section 179 or bonus) were often made first, with QBI implications discovered later at tax time.

Key takeaways:

• Exceeding the income threshold could completely phase out QBI for SSTBs.
• Strong growth or large one-time gains could unintentionally eliminate the deduction.
• Reactive planning often meant missed opportunities to optimize QBI.

QBI Under the OBBBA (2026 and Beyond)

The One Big Beautiful Bill (OBBBA) extended the QBI deduction that was supposed to be sunset at the end of 2025 through 2029, providing MSP owners with more certainty for multi-year tax planning. While the core mechanics of Section 199A remain unchanged, SSTB rules, taxable income thresholds, and phase-outs still apply. MSPs whose taxable income exceeds the threshold (roughly low-to-mid $200K for single filers and $400K for joint filers in recent years since the thresholds are indexed for inflation) will see their deduction gradually reduced or eliminated.

For MSPs above the thresholds, additional wage and property tests now determine the maximum deduction. The QBI deduction may be limited by either 50% of W‑2 wages paid by the business, or 25% of W‑2 wages plus 2.5% of the unadjusted basis of qualified depreciable property (UBIA), which includes servers, networking equipment, and other capital assets.

MSP owners should actively review compensation and asset strategies:

• Ensure owner compensation is structured as W‑2 wages, not just distributions.
• Verify total payroll is sufficient to support the desired QBI deduction.
• Inventory depreciable assets still within their recovery period that may count toward the property test.
• Coordinate compensation and depreciation elections before filing, not after the fact.
  

QBI is no longer automatic for MSPs above the income threshold. It rewards intentional planning around income, compensation, and asset strategy rather than passive profitability.

How Your MSP’s Business Structure Affects the QBI Deduction

Your MSP’s entity structure doesn’t change the rules of the QBI deduction, but it does change how easily you can qualify for it. Under IRC §199A, the deduction applies to pass-through income, but the way income reaches the owner and how compensation is paid can materially affect the outcome.

• S-corporations: Owners must pay themselves reasonable W-2 wages. Those wages support QBI eligibility under the wage test, but they also reduce qualified business income since wages are not QBI.
• Partnerships & LLCs taxed as partnerships: Income flows through directly to owners. There’s no W-2 wage requirement for partners, but eligibility is still tied to taxable income levels and overall profitability.
• Sole proprietorships: Income is fully pass-through, but the deduction is highly sensitive to taxable income and has no wage cushion once thresholds are exceeded.

The tradeoff is always balance:

• Too much compensation can shrink QBI.
• Too little can create compliance risk and limit planning options.
• The “right” mix depends on income level, growth plans, and reinvestment strategy—not a one-time entity decision.

For MSPs navigating growth, reinvestment, or ownership changes, this is where proactive QBI planning and guidance from tax professionals who understand MSP economics becomes especially valuable.

Strategies to Preserve the QBI Deduction under the OBBBA

Under the Big Beautiful Bill, the Qualified Business Income (QBI) deduction remains available, but it still requires planning. For MSPs, preserving the Section 199A deduction is less about maximizing it in a single year and more about managing your numbers intentionally so your business stays eligible as it grows.

Below are the specific planning strategies MSPs use to continue claiming the 20% QBI deduction on future tax returns, especially as revenue increases, headcount expands, and investment in technology accelerates.

1. Income Smoothing

One of the most effective and overlooked strategies MSPs use to preserve QBI is income smoothing.

QBI eligibility begins to phase out once taxable income exceeds certain thresholds, and this phase-out can occur more quickly than many owners expect. MSP income, however, is rarely linear. Large hardware projects, renewals, M&A activity, or delayed expenses can cause income to spike in a single year even if the business hasn’t fundamentally changed.

Income smoothing isn’t about hiding income. It’s about timing:

• Deferring or accelerating revenue when appropriate
• Aligning major purchases with high-income years
• Avoiding unnecessary “lumpiness” that pushes taxable income just over the QBI threshold

2. Entity Restructuring

As your MSP grows, the entity you started with may no longer optimize QBI. Sole proprietorships, partnerships, and S-corps all interact differently with the deduction, especially once income hits six or seven figures.

Quick ways to stay eligible:

• Adjust owner W-2 wages vs. distributions
• Rebalance profit-sharing or ownership percentages
• Review how much profit is retained vs. distributed
• Only change entity type if smaller adjustments aren’t enough
  

Treat your entity as a planning tool, not a one-time decision. Revisit it as revenue, payroll, and growth change to keep the 20% QBI deduction intact.

3. Coordinating Depreciation and Compensation

QBI doesn’t exist in a vacuum. It’s directly affected by how MSPs use Section 179, bonus depreciation, and owner compensation.

Large depreciation elections can reduce taxable income, sometimes helping preserve QBI eligibility, but they can also distort income in ways that complicate planning if not modeled properly. Similarly, owner wages reduce QBI even though they may be necessary for compliance and long-term strategy.

How do you calculate your QBI deduction?

The Qualified Business Income (QBI) deduction isn’t just a flat 20% times your revenue, it’s calculated using a series of steps that take into account your business income, your total taxable income, and certain limitations that could reduce or eliminate the benefit. At a high-level, here’s how it works in practice.

Necessary disclaimer: we are not licensed accounting or tax professionals. Please consult yours before filing your taxes. Looking for an accountant? Here’s our guide and list of recommendations.  

1. Determine Your Qualified Business Income (QBI)

Qualified Business Income is the net amount of income, gain, deduction, and loss from qualified trades or businesses that are effectively connected with the conduct of a U.S. business. This typically starts with your net profit from Schedule C (sole proprietorship), Schedule E/K‑1 income (partnership, S‑corp), or other qualified pass‑through income. You then exclude items like wage income, capital gains, investment income, and certain other non‑business items.

QBI is essentially “business net profit” after ordinary business deductions, not gross sales or receipts.

2. Multiply QBI by 20%

The base deduction is 20% of your total QBI (plus 20% of qualified REIT dividends or qualified PTP income, if any).

For example: if your net QBI from your MSP is $200,000, the base QBI deduction would be $40,000 (20% × $200,000).

3. Apply the Taxable Income Limitation

Your QBI deduction can never exceed 20% of your taxable income (before the QBI deduction) minus net capital gain.

So if your adjusted taxable income before QBI is $220,000 with $10,000 in net capital gains then 20% of taxable income less net capital gain = 20% × ($220,000 – $10,000) = $42,000.
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Your final QBI deduction would be the lesser of:

• 20% of QBI ($40,000), or
• 20% of taxable income minus net capital gains ($42,000).
  → You can claim $40,000.

If your business is the only source of income and you have no net capital gain, this second limit often won’t be the binding one, but it still must be checked.

4. Consider Wage and Property Limits (if Income Is High)

If your taxable income exceeds certain IRS thresholds, additional limits kick in based on: W‑2 wages paid by the business and Unadjusted Basis Immediately after Acquisition (UBIA) of qualified property.

This applies whether or not you’re an SSTB, but it matters most when your income is above the threshold:

These additional tests limit the QBI deduction to the greater of:

• 50% of W‑2 wages paid by the business, or 25% of W‑2 wages + 2.5% of UBIA of qualified depreciable property.

The simplest way to think about this is:

Above the thresholds, the QBI deduction can be reduced by low wages and low capital investment. This is especially relevant for S‑corporation owners (because wages are counted separately) and MSPs with high asset investment.

5. Accounting for SSTBs (Specified Service Trades or Businesses)

Since most MSPs can be treated as specified service trades or businesses (SSTBs) for IRS purposes, if your total taxable income exceeds the IRS threshold: your QBI deduction may phase out or be eliminated entirely depending on your income level relative to the annual SSTB threshold. Below the threshold, SSTBs get the full 20% QBI benefit; above it, the deduction phases out and eventually zeros out.

6. Form 8995/Form 8995‑A Does the Heavy Lifting

If your taxable income is below the IRS threshold, you use Form 8995 (simpler). If it’s above the threshold or you have multiple businesses/SSTB issues, you use Form 8995‑A (more complex). But both forms walk through the steps of computing QBI, applying limits, and arriving at the final deduction.
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If any of this seems complicated alongside the other changes to tax law that affect MSPs, it may be time to get a specialized financial expert.

Key Takeaways: Building a Long-Term QBI Strategy Under the OBBBA

The Qualified Business Income (QBI) deduction remains a meaningful tax benefit for MSP owners under the OBBBA, but it’s no longer something that works well on autopilot. QBI now requires more intentional planning as income levels, entity structure, depreciation elections, and owner compensation all interact more tightly under the current tax framework.

For MSPs, the biggest shift is recognizing that QBI is a multi-year strategy. The way income is recognized, how deductions like Section 179 and bonus depreciation are used, and when profits are accelerated or deferred can all materially impact how much QBI is actually usable in a given year. Structure and timing matter, and small decisions made in isolation can quietly erode the benefit over time.

That’s why effective QBI planning should be modeled annually now after being extended through 2029, not revisited only at filing time. Growth years, reinvestment cycles, ownership changes, and expansion plans all affect QBI outcomes differently. Without proactive modeling, MSPs risk either underutilizing the deduction or accidentally phasing themselves out of it during key growth periods.

At the owner level, QBI planning should also be tied to broader financial goals. Whether you’re optimizing cash flow today, preparing for a future exit, or aligning compensation with long-term growth, QBI decisions should support where the business is headed, not just minimize this year’s tax bill. MSPs that integrate QBI planning into their long-term strategy are far better positioned to preserve flexibility, manage risk, and maximize after-tax returns as the business scales. Stay ahead of tax season: get your 2026 MSP Tax Prep Checklist now.

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