TCJA provided a tax benefit for most non-C corporation business owners in the form of a deduction that is generally equal to 20% of their qualified business income (QBI). This deduction is most commonly known as a pass-through income deduction because it applies to income from pass-through business activities where the income passes through to the individual’s, partner’s or stockholder’s individual 1040 tax return. This category includes income from sole proprietorships, partnerships, S-corporations, rentals, farms, Real Estate Investment Trusts (REITs), and pass-through income from publicly traded partnerships. The shorthand term for this deduction is the 199A deduction

OBBBA 2025 makes the deduction for qualified business income permanent. For taxable years beginning after December 31, 2025, this provision makes the 20% permanent. In addition, see later in this guide for the adding of Business Development Company (BDC) interest dividends as qualified income. OBBBA added a minimum $400 QBI deduction for certain taxpayers.

California does not conform to the federal Section 199A Qualified Business Income deduction, which allows for a 20% deduction on qualified business income for certain pass-through entities.  Because the QBI deduction is not a factor in determining federal AGI, there is no corresponding adjustment on the California Schedule CA.