Section 199A

Section 199A allows non-corporate taxpayers to deduct up to 20 percent of qualified business income from partnerships, S corporations, sole proprietorships, and certain trusts and estates, plus a deduction for qualified REIT dividends and publicly traded partnership income. Its purpose was to narrow the gap between the 21 percent corporate rate and the top individual rate applied to pass-through income. Originally scheduled to expire after 2025, the deduction was made permanent at 20 percent by the One Big Beautiful Bill Act.

Qualified business income means the net amount of income, gain, deduction, and loss from a qualified US trade or business. It excludes capital gains and losses, dividend income, most interest income, reasonable compensation paid to an S corporation shareholder, and guaranteed payments to partners.

The deduction's complexity comes from two limitations that apply above an income threshold indexed annually. First, for specified service trades or businesses - health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage, and any business whose principal asset is the reputation or skill of its owners - the deduction phases out entirely once taxable income exceeds the threshold plus the phase-in range. Second, for all other businesses above the threshold, the deduction is capped at the greater of 50 percent of W-2 wages paid or 25 percent of W-2 wages plus 2.5 percent of the unadjusted basis of qualified property. OBBBA widened the phase-in ranges beginning in 2026, softening the cliff effect that previously made small changes in taxable income produce disproportionate swings, and added a minimum deduction for taxpayers with modest amounts of active QBI.

Planning levers include aggregation elections, entity structuring, wage and compensation calibration, and retirement plan contributions that reduce taxable income below thresholds.