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 $276,750 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 $272,300, applying 2025-baseline thresholds before 2026 inflation adjustment) and $150,000 for MFJ ($403,500 to $544,600). Above the top of the range, the full limitation applies. Verify the specific 2026 threshold under Rev. Proc. 2025-32.
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. Must meet real estate professional rules for full benefit. |
| 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)(1)(B). |
| 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. The QBI deduction increases from $40,000 to $44,000 (the tentative amount), saving an additional $1,400 in tax. The additional $20,000 in salary costs $3,060 in FICA taxes. Net: higher salary costs more in FICA than it saves in QBI. 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.