How the 2025 Tax Law Impacts Pass-Through Businesses

If you own a small business, you probably use what’s called a pass-through entity. That includes a partnership, an S corporation, or a sole proprietor business. The business “passes through” its income to you and you report it on your personal tax return. As a CPA, I want to explain what the new 2025 tax law means for pass-through businesses, and what you should do now to plan smart.

What is a pass-through business?

A pass-through business is a business where profits and losses go through the business to the owner(s). You don’t pay business income tax at the business level (like a C corporation might). Instead:

• For an S corporation, you get your share of income or loss.
• For a partnership, you get your share of income or loss.
• For a sole proprietorship or single-member LLC, your business income is part of your personal tax return.

Because of this, changes in tax law for pass-throughs can matter a lot for business owners.

What changed in the 2025 tax law for pass-through businesses?

Here are three big changes under the 2025 tax law that affect pass-throughs:

1. The Qualified Business Income (QBI) Deduction is now permanent.
   Under earlier law (the Tax Cuts and Jobs Act, or TCJA), you could deduct up to 20% of qualified business income from a pass-through business (called the QBI deduction). The 2025 law makes that deduction permanent for many business owners.
2. Some phase-in limits and rules got better.
   The new law increases the phase-in thresholds for the QBI deduction for certain business owners. That means more business owners may qualify or have fewer restrictions.
3. Limits on business losses and other rules remain important.
   If your pass-through business has a large loss, the law limits how much of that loss you can offset against non-business income. For 2025 the threshold for “excess business loss” kicks in at roughly $313,000 single / $626,000 married filing jointly.

What CPAs are telling business owners to do now

As your CPA (or if you are reading this from your CPA’s vantage), here are steps you should take right away, and how to plan.

• Review your entity type

If you’re running the business as a sole proprietor, partnership, or S-corp, make sure your structure still makes sense under the new law. The QBI deduction applies to pass-through entities, so being in the right entity can help. Also think about how profits and losses pass through, and whether your distribution strategy is optimal.

• Check your profit distribution and wages

For an S-corporation especially, how you pay yourself matters (salary vs distributions). Your wages may affect how your QBI deduction works (wage and basis tests apply). While the law hasn’t changed all those rules, the permanence of the QBI deduction means you want to plan ahead. Ensure you pay a reasonable salary, and track wages and basis carefully.

• Project your 2025 income and losses

Since the law affects tax year 2025 and beyond, estimate your business income and losses now. If you expect a big loss, remember the excess business loss rule may limit how much you can deduct now. If you expect strong profits, make sure you plan to maximize the QBI deduction and other benefits.

• Keep good records for QBI deduction eligibility

You want to be sure your business qualifies for the QBI deduction: it must have qualified business income (QBI), be a qualifying trade or business (not a disallowed “specified service trade or business” above certain income thresholds), and meet wage and basis tests. Work now with your CPA to check your business qualifies.

• Think about right-timing of income and expenses

Because these rules are now permanent (or differences made permanent), year-end planning matters. If you expect 2025 to be a strong year, you may want to accelerate income or delay expenses in some cases (always consistent with the law) so you can maximize the QBI deduction. If 2025 may be weak, you could consider other planning steps.

• Review state and local tax implications

Some states have “PTE taxes” (pass-through entity taxes) that allow the business to pay state taxes at the entity level. That may change how your business pays state taxes and how your pass-through owners are taxed. These rules interact with the federal law, so check your state rules with your CPA. \

Common questions business owners have

Q: Will every pass-through business benefit from the QBI deduction?
A: No. Some businesses are “specified service trades or businesses” (SSTBs) and are subject to income phase-outs. Also, if your taxable income is above certain thresholds, you may have wage/basis limits.

Q: Does the QBI deduction change for 2025?
A: The deduction remains up to 20% of QBI in many cases, and under some proposals it might increase (to 23%) but check with your CPA.

Q: What if I have a loss in my pass-through business?
A: If your business has a large loss, the excess business loss rule limits how much you can offset against other income. Any disallowed loss carries forward.

Why this matters for business owners

• A strong QBI deduction means more after-tax profit stays with the owner.
• If you don’t plan, you might miss out on savings.
• Wrong entity choice or bad timing of income/expenses could cost you money.
• With the deduction being permanent, planning is not just for one year—it matters long-term.

Final thoughts

As a CPA working with pass-through business owners, my advice is: don’t wait. Use the rest of 2025 to review your business structure, project your income and losses, make sure you qualify for the QBI deduction, and plan distributions and wages. The law now gives stability, but stability means you need to align your planning.

If you need help with entity selection, modeling your 2025 tax outcome, or making sure you meet all eligibility tests, now is the time to reach out to your CPA. The sooner you act, the better you’ll position your business for tax success.