Small Business Tax Cut Act

Summary

Increases the qualified business income (QBI) deduction for pass-through businesses from 20% to 23% and changes related limitations and definitions. It also creates an elective category allowing certain dividends from business development companies (BDCs) to qualify as QBI and updates an inflation-adjustment rule. These changes apply to taxable years beginning after December 31, 2026, and affect owners of pass-through entities, some investors in BDCs, and tax advisers who must apply the revised phase-in and limitation rules for specified service trades or businesses (SSTBs).

• Raises the QBI deduction rate from 20% to 23% for pass-through business owners.
• Revises income-based limits and phase-in mechanics that determine how much of the QBI deduction is allowed for higher-income taxpayers and SSTBs.
• Creates an elective category allowing certain BDC dividends (attributable to net interest) to be treated as qualified business income.
• Makes technical edits to existing QBI statutory language and an inflation-adjustment rule.
• Applies to taxable years beginning after December 31, 2026.
• Primarily benefits owners of pass-through entities; the net effect depends on taxpayer income, business type, and elections made.
• Increases tax code complexity for taxpayers and advisers because of new definitions and altered phase-in rules.
• Does not appropriate funds or impose federal mandates on states or localities.