The Tax Cuts and Jobs Act introduced a business income deduction that went into effect after December 31, 2017, and continues until December 31, 2025 when it is scheduled to sunset. This deduction is referred to as the Section 199A deduction. Section 199A allows eligible taxpayers to take a deduction of up to 20% of their qualified business income (QBI) from qualified trades and businesses. Section 199A also allows taxpayers to deduct 20% of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income.
What is considered Qualified Business Income?
Qualified business income (QBI) may be defined as the net amount of qualified income, gains, deductions, and losses from qualified trades or businesses that are:
- directly connected to the operations of a business located within the United States, and
- included in determining their taxable income
This includes income from sole proprietorships and pass through entities and is reduced by the deductible part of self-employment tax, self-employed health insurance, and deductions for contributions to qualified retirement plans such as SEP and SIMPLE plans.
Income that does not count as part of qualified business income includes, but is not limited to:
- Dividend income
- Interest income
- Foreign currency transaction gains/losses
- Compensation or wages (unless it was paid out to the business)
- Guaranteed payments
Determining who is eligible for taking this deduction
Individuals, trusts, and estates may be eligible for the QBI deduction.
Individuals and businesses not eligible for taking this deduction include income earned from the following:
- C corporations
- Employees in a business (must have ownership of the business to be eligible)
- Specified service trades or businesses that fall outside the income threshold
Businesses considered to be a specified service trade or business (SSTB) may perform services in the area of law, accounting, health, performing arts, athletics, and more.
Section 199A Deduction Limitation:
Taxpayers taking this deduction are limited to 20% of the lesser of either their:
- qualified business income (QBI) or
- taxable income after the reduction for any net capital gains, but before the 199A deduction is considered.
Taxable income is generally your adjusted gross income (AGI) minus your standard or itemized deduction.
According to the IRS, the income limitations for the qualified business income deduction for the 2024 tax year are as follows:
The phase out income level is adjusted for inflation with each tax year. Looking at the table above, in 2024, it is showing the QBI deduction will be phased out (reducing the amount of deduction) if your income is between $191,951 to $241,950 for single filers and $383,901 to $483,900 for joint filers that have specified service trade or business (SSTB) income.
Income limitation phase-in rules apply when taxable income exceeds $483,900 (MFJ) or $241,950 (single) where this QBI deduction may be limited by the wages paid by the qualified business. For these high-income taxpayers, the section 199A deduction cannot exceed the greater of 50% of W-2 wages or the sum of 25% of W-2 plus 2.5% of the unadjusted basis immediately upon acquisition of all qualified property. This means the original purchase price of all depreciable assets; thus, land does not count towards this calculation because it is not a depreciable asset.
QBI Loss Carryover
In some cases where you have multiple businesses being reported in a given year the qualified business income will end up being a negative value after you net the total amount of QBI from all businesses together. You will be required to take that negative amount of QBI and carry it forward it to the next year which will end up reducing the amount of QBI deduction you may be eligible to take in a future tax year.
Conclusion
Given the fact that Section 199A QBI deduction was enacted January 1, 2018, and will last until at least December 31, 2025, it is important that taxpayers be mindful of this and take full advantage of this deduction while it remains in effect. By doing so, taxpayers may be able to significantly reduce their tax liability, saving a lot of money. The rules surrounding this deduction can be quite complex and understanding how these rules might apply in different cases is the key to saving on your tax return. As always, consulting a tax professional is the best way to stay informed and be presented with good advice and strategies for maximizing tax benefits especially as tax laws change from year to year as we may see in 2026 after the Tax Cuts and Jobs Act potentially sunsets on December 31, 2025.
Written by Jenna Leid, Staff Accountant