Qualified Business Income Deduction (199A)
The Qualified Business Income (QBI) deduction under IRC Section 199A, created by the Tax Cuts and Jobs Act of 2017, allows eligible self-employed individuals and pass-through business owners to deduct up to 20 percent of their qualified business income from US federal income taxes, reducing the effective tax rate on pass-through earnings.
The deduction is available to sole proprietors, partners in partnerships, shareholders in S corporations, and owners of certain trusts and estates. It applies to qualified business income — the net amount of income, gains, deductions, and losses from a qualifying trade or business conducted within the United States. Reasonable compensation paid by an S corporation to its owner-employee is excluded from QBI, as are guaranteed payments from partnerships.
For taxpayers with taxable income below the phase-in threshold ($191,950 for single filers and $383,900 for joint filers in 2024, adjusted annually), the deduction is straightforward: 20 percent of QBI, limited to 20 percent of taxable income minus net capital gains. Above those thresholds, the deduction is subject to the W-2 wage limitation, which caps the deduction at the greater of 50 percent of W-2 wages paid by the business or 25 percent of W-2 wages plus 2.5 percent of the unadjusted basis of qualified property.
Specified service trades or businesses (SSTBs) — which include law, accounting, health, consulting, financial services, performing arts, and athletics — are phased out of eligibility once the owner's taxable income exceeds the threshold ranges, eventually receiving no deduction at all.
The deduction is scheduled to expire after the 2025 tax year unless Congress acts to extend or make it permanent. Business owners relying on the 199A deduction should model the post-2025 tax landscape in their financial planning, as losing the deduction would increase the effective marginal rate on pass-through income by up to 7.4 percentage points for taxpayers in the 37 percent bracket.