The Section 199A deduction allows owners of pass-through businesses - sole proprietors, partnerships, S-corporations, and certain trusts - to deduct up to 20% of qualified business income from federal taxable income. OBBBA (P.L. 119-21) made this deduction permanent. At high income levels, the deduction is limited by W-2 wages paid and the type of business. At lower income levels, it is largely automatic.
The §199A deduction was originally set to expire after 2025. OBBBA (P.L. 119-21) made it permanent at the 20% rate. The deduction continues indefinitely with no sunset. Importantly, the House version of OBBBA proposed a 23% rate, but the final enacted bill kept the rate at 20%. OBBBA did expand the phase-in ranges (single: $50K → $75K; MFJ: $100K → $150K) and added a $400 minimum deduction for taxpayers with at least $1,000 of QBI from a qualified trade or business in which the taxpayer materially participates. Effective for tax years beginning after December 31, 2025.
The W-2 wage limitation phases in proportionally between the threshold and the top of the phase-in range. Pre-OBBBA, a single filer with taxable income between $201,750 and $251,750 (a $50,000 range) faced a partial limitation. Post-OBBBA (effective for tax years beginning after 12/31/2025), the phase-in range widens to $75,000 for single filers ($201,750 to $276,750 for 2026) and $150,000 for MFJ ($403,500 to $553,500 for 2026). Above the top of the range, the full limitation applies (Rev. Proc. 2025-32 section 4.26).
Specified service trades or businesses are excluded from the QBI deduction once income exceeds the phase-in range. The exclusion phases in between the threshold and the top of the range, and is complete above the phase-in range.
| Business Type | SSTB? | Notes |
|---|---|---|
| Law | SSTB | Legal services - excluded above income threshold |
| Accounting / Tax | SSTB | Accounting, tax preparation, bookkeeping, payroll services |
| Medicine / Health | SSTB | Physicians, nurses, dentists, veterinarians, physical therapists |
| Consulting | SSTB | Providing advice or counsel. Engineering and architecture excluded from SSTB definition. |
| Financial services | SSTB | Investment management, securities trading, brokerage |
| Athletics / performing arts | SSTB | Athletes, actors, musicians |
| Real estate (active) | Not SSTB | Real estate businesses qualify if the activity rises to the level of a §162 trade or business (Treas. Reg. §1.199A-1(b)(14)); real estate professional status is not required. |
| Rental real estate | Not SSTB | Qualifies if rental activity rises to the level of a trade or business. Rev. Proc. 2019-38 safe harbor: 250+ hours/year. |
| Engineering / Architecture | Not SSTB | Specifically excluded from SSTB by statute despite being professional services. IRC §199A(d)(2)(A). |
| Manufacturing / Retail | Not SSTB | Typically qualify. W-2 wage limitation most relevant here. |
| Any trade or business with principal asset being reputation/skill of employee/owner | SSTB | Catch-all provision. Treas. Reg. §1.199A-5(b)(2)(xiv). |
This is where S-Corp planning and QBI planning intersect directly. The W-2 wage limitation at high income levels can actually make paying a higher S-Corp salary advantageous for QBI purposes, even though a higher salary increases FICA taxes. The S-Corp salary creates W-2 wages that expand the QBI deduction ceiling.
In the example above: if the owner paid themselves $100,000 instead of $80,000, the W-2 limit rises to $50,000, but QBI also falls by the extra $20,000 of salary (to $200,000, before the employer share of payroll tax), so the tentative deduction falls to $40,000 and the deduction stays at $40,000. The additional $20,000 in salary costs $3,060 in FICA taxes with no QBI benefit. A salary increase helps only until 50% of W-2 wages catches up with 20% of the remaining QBI (about $85,714 of salary in this example, for a deduction of about $42,857). The optimal salary depends on the specific numbers and requires running both calculations.
Rental income from real estate qualifies for the §199A deduction if the rental activity constitutes a "trade or business" under IRC §162. Rev. Proc. 2019-38 provides a safe harbor: if the landlord (or their agents) perform 250 or more hours of rental services per year and maintain contemporaneous records, the activity is treated as a trade or business for QBI purposes. Triple-net leases (NNN) are excluded from the safe harbor but may still qualify based on facts and circumstances.