Kustoff Bill Would Boost Section 199A Deduction to 23%, Expand QBI Eligibility
There is a slim chance that this will pass sometime this year
Rep. David Kustoff (R-Tenn.) introduced the **Small Business Tax Cut Act on April 13, 2026, proposing several significant modifications to Section 199A of the Internal Revenue Code. The bill would increase the qualified business income (QBI) deduction, broaden the universe of taxpayers eligible to claim it, and extend the deduction to certain dividends from business development companies (BDCs).
Higher Deduction Rate
The headline change is a bump in the QBI deduction percentage from 20% to 23%, effectively raising the maximum pass-through deduction available to owners of sole proprietorships, partnerships, S corporations, and certain trusts and estates.
Restructured Taxable Income Limitations
The bill rewrites Section 199A(b)(3) to modify how the W-2 wage and qualified property limitations apply to higher-income taxpayers. Under the proposed language, taxpayers below the threshold amount would continue to claim the deduction without limitation, and specified service trades or businesses (SSTBs) including health, law, accounting, and consulting would no longer be disqualified at that level.
For taxpayers above the threshold, a new “limitation phase-in amount” equal to 75% of the excess of taxable income over the threshold would apply. This effectively increases the deduction for SSTBs (at least up to a certain point).
New Category: Qualified BDC Interest Dividends
The legislation expands the deduction to cover “qualified BDC interest dividends” which are dividends from electing business development companies attributable to net interest income properly allocable to a qualified trade or business. This change parallels the treatment already afforded to qualified REIT dividends.
Inflation Adjustment and Effective Date
The bill updates the inflation adjustment base year under Section 199A(e)(2)(B) from 2018 to 2025. The amendments would apply to taxable years beginning after December 31, 2026.
We had Claude AI create the new text of Section 199A as if the bill had passed and we are attaching a copy of that text.
Also, here is an example of the 199A deduction for a CPA that nets $700,000 with $600,000 of taxable income filing a joint return:
