Understanding the 199A Deduction

For tax years 2018-2025, the 2017 Tax Cuts and Jobs Act included a new deduction for non-corporate taxpayers for their domestic qualified business income (QBI). The deduction is generally 20% of a taxpayer’s QBI from a partnership, S corporation, or sole proprietorship. QBI is defined as the net amount of income, gain, deduction, and loss with respect to a trade or business.

The deduction is taken below the line, reducing your taxable income but not your adjusted gross income. If QBI is less than zero it is treated as a loss from a qualified business in the following year.

Significant limitations and qualifications apply. The deduction could be limited by the type of business you are operating, your taxable income, W-2 wages paid, and the unadjusted basis of qualified property.

If your taxable income before the QBI deduction is less than $157,500 if filing single or $315,000 if married filing jointly (these thresholds will increase for 2019), all of your business income is treated as coming from a qualified trade or business. If you fall under this threshold, there is no need to determine whether your business income is Qualified Business Income. Take the QBI and deduct 20 percent of it against that specific trade or business.

If your taxable income before the QBI deduction is above the income limits, you need to then determine if your business is a specified service trade or business (SSTB). An SSTB is defined as any trade or businesses involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial or brokerage services, or any trade or business where the principal asset is the reputation or skill of one or more of its employees. For taxpayers with taxable income above the aforementioned thresholds, an exclusion from QBI of income from an SSTB is phased in. All of the net income from the specified service trade or business is excluded from QBI when taxable income reaches $207,500 and $415,000, respectively. For taxpayers with taxable income more than the above thresholds that do not have an SSTB, your deduction could be limited based on W-2 wages paid and the unadjusted basis of qualified property.

For taxpayers that have activity from rental property, there are additional guidelines. If the taxpayer holds the property for investment purposes, they cannot take the QBI deduction. To be eligible for the deduction, a taxpayer that holds rental property as a real estate business can either meet the standard of a trade or business or the safe harbor requirements. Final guidance for the safe harbor guidelines was released by the IRS with Rev. Proc. 2019-38. These guidelines include such stipulations as at least 250 hours of rental services must have been performed annually in any three of the five preceding tax years, triple net leases don’t qualify, separate books and records for each activity must be maintained including documentation of hours, services performed, etc. If either of these standards are met, the taxpayer will be eligible to claim the QBI Deduction.

This deduction comes with some complexity. Please note other limitations may apply in certain circumstances.

Scroll to Top