John E. Chapman Chief Executive OfficerWhen business owners realize a Roth conversion may effectively qualify for a 20% deduction, a familiar planning decision starts to look different. The conversion still creates taxable income today. But for owners whose qualified business income (QBI) deduction is limited by taxable income, it may also unlock a deduction they otherwise could not use.
The permanence of the QBI deduction under the One Big Beautiful Bill Act (OBBBA) provides eligible business owners with a more stable framework for evaluating Roth conversion strategies. Prior to the legislation, the deduction was scheduled to expire after 2025, creating uncertainty for taxpayers considering multi-year conversion plans. Making the deduction permanent, OBBBA allows business owners to evaluate Roth conversions over an extended time horizon with greater confidence that the deduction will remain available. Although Roth conversions remain highly individualized and are not appropriate in every circumstance, the interaction between conversion income and the QBI deduction can create a meaningful planning opportunity that many taxpayers do not have.
The QBI deduction, also known as the Section 199A deduction, allows eligible business owners to deduct up to 20% of their qualified business income. QBI generally consists of net business profit after certain IRS-prescribed adjustments. However, the deduction is subject to several limitations, including an overall cap tied to taxable income. Specifically, it cannot exceed 20% of taxable income before the QBI deduction, reduced by net capital gain. As a result, a business owner may generate enough qualified business income to support a larger deduction but have the deduction reduced because taxable income on their personal return is insufficient.
That is where a Roth conversion can become particularly useful. Converting pre-tax IRA dollars to a Roth IRA increases taxable income. When taxable income is the limiting factor, each dollar converted may unlock an additional 20 cents of QBI deduction until the full deduction is available. The conversion remains taxable, but the incremental deduction can reduce its effective federal income-tax cost.
Simplified Example
Consider a married couple with $150,000 of qualifying business income, no other income, and the 2026 standard deduction of $32,200. Before applying the QBI deduction, their taxable income would be $117,800. Although 20% of their QBI equals $30,000, the taxable income limitation would cap the deduction at $23,560. A $32,200 Roth conversion would increase taxable income before the QBI deduction to $150,000, allowing the couple to claim the full $30,000 deduction. In effect, the conversion unlocks an additional $6,440 deduction, equal to 20% of the amount converted.
Planning Considerations
The arithmetic is straightforward; the decision is not. Eligibility for the QBI deduction can depend on taxable income, business type, W-2 wages, qualified property, entity structure, and other factors. A Roth conversion may also affect marginal tax brackets, Medicare premiums, state income taxes, cash flow, and other income-based thresholds. The resulting tax must be funded, ideally without undermining the broader financial plan. These considerations are not reasons to dismiss the strategy. They are reasons to evaluate it in context rather than view an available conversion as an automatic recommendation.
The Bottom Line
For certain business owners, the gap between qualified business income and taxable income creates an advantage that is easy to overlook. A carefully sized Roth conversion may unlock an otherwise unused QBI deduction and reduce the conversion’s effective federal tax cost. The opportunity can be meaningful, but it is only one factor in a broader decision involving current and future tax rates, retirement assets, liquidity, and long-term flexibility. Used well, it is not a reason to convert more. It is a reason to plan more precisely.
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