The Section 199A deduction (QBI deduction) allows eligible taxpayers to deduct up to 20% of qualified business income, plus 20% of qualified REIT dividends and PTP income. The deduction applies to individuals, certain trusts, and estates—not corporations.
Originally temporary under the TCJA, the One Big Beautiful Bill Act:
- Makes the 20% deduction permanent
- Expands the phase‑out range to $75,000 ($150,000 MFJ)
- Creates a minimum deduction of $400 for taxpayers with at least $1,000 of QBI from active, materially‑participated trades or businesses
The deduction cannot exceed 20% of taxable income, before the QBI deduction, minus net capital gain.
Who Claims the Deduction
- Individuals claim the deduction on Form 1040
- Trusts and estates claim it on Form 1041
- S corporations and partnerships do not claim the deduction; they pass QBI information to owners on Schedule K‑1
If a passthrough entity fails to report QBI information, the amount is presumed zero.
Material participation is not required to claim the deduction.
Qualified Trade or Business
A qualified trade or business includes any activity conducted for income, except:
- A specified service trade or business (SSTB)
- The trade or business of performing services as an employee
If taxable income is below the threshold, SSTBs are treated as qualified trades or businesses.
Courts use two criteria to determine whether an activity is a trade or business:
- Profit motive
- Regular, continuous activity
Hobbies do not qualify; some activities like gambling may qualify depending on facts.
Rental Real Estate Safe Harbor
Because rental real estate often falls into a gray area, Revenue Procedure 2019‑38 provides a safe harbor for treating a rental real estate enterprise as a trade or business.
Safe Harbor Requirements
- Separate books and records
- 250+ hours of rental services (per year for new enterprises; 3 of 5 years for older ones)
- Contemporaneous records of hours, services, dates, and providers
- Annual statement attached to the return
Excluded Arrangements
- Property used as a residence
- Triple‑net leases
- Property rented to commonly controlled businesses
- Property treated as an SSTB under special rules
Performing Services as an Employee
Income from performing services as an employee is not QBI.
A worker treated as a contractor may still be considered an employee for Section 199A if:
- They previously performed the same services as an employee
- They continue providing substantially identical services
- The presumption lasts three years
Taxpayers may rebut the presumption with evidence of genuine non‑employee status.
Specified Service Trade or Business (SSTB)
An SSTB includes businesses in:
- Health
- Law
- Accounting
- Actuarial science
- Performing arts
- Consulting
- Athletics
- Financial services
- Brokerage services
- Investing, investment management, trading, dealing in securities
- Businesses where the principal asset is the reputation or skill of owners/employees (endorsements, licensing, appearance fees)
If taxable income is below the threshold, SSTB status does not matter.
De Minimis Rule
A business is not an SSTB if:
- SSTB receipts are <10% of total receipts (or <5% if receipts exceed $25M)
Components of the Deduction
A taxpayer may deduct:
- 20% of QBI, plus
- 20% of qualified REIT dividends and PTP income
Losses in one component do not offset the other; they carry forward separately.
Qualified Business Income (QBI)
QBI is the net amount of qualified items of income, gain, deduction, and loss from a qualified trade or business.
QBI includes income from:
- Sole proprietorships
- Partnerships
- S corporations
- Certain trusts and estates
Items Not Included in QBI
- Capital gains/losses
- Dividends
- Interest not allocable to the business
- Wage income
- Foreign‑source income not effectively connected
- Commodities/FX gains
- Annuities (unless business‑related)
- S corporation reasonable compensation
- Partnership guaranteed payments
- Payments to partners acting outside partner capacity
Deductions Allocable to QBI
QBI must reflect deductions tied to the business, including:
- Charitable contributions
- Unreimbursed partnership expenses
- Business interest
- Deductible self‑employment tax
- Self‑employed health insurance
- Retirement plan contributions
Disallowed Losses
Losses disallowed under basis, at‑risk, passive, or §461(l) rules are included in QBI only when allowed.
Puerto Rico Rule
If all Puerto Rico‑source QBI is taxable under §1, it is treated as U.S.‑source for QBI purposes.
Qualified Business Loss Carryover
If total QBI across all qualified trades or businesses is negative:
- The loss becomes a qualified business loss carryover
- It offsets future QBI until fully absorbed