Good to Know

The Section 199A deduction, popularly referred to as the 20% Qualified Business Income deduction, was enacted to reduce the disparity in income tax rates between C Corporations and “pass-through businesses.” There is no entity level income tax in pass-through businesses – business gains and losses “pass through” to the business owner’s personal income tax return.

The C Corporation flat income tax rate is 21% while the top personal income tax rate is 37%. The purpose of the 20% Qualified Business Income Deduction is to reduce the potential income tax rate competitive advantage of C Corporations versus pass-through business forms. We begin with key terminology.

Qualified Business

A qualified trade or business is generally any domestic U.S. trade or business operating in a pass-through structure such as sole proprietorship, partnership, S Corporation, or Limited Liability Company (generally).

However, these businesses are NOT considered qualified businesses:

  • C Corporations, and
  • Pass-through businesses providing services.

Service Trade or Business

A service trade or business is any business whose primary revenue is derived from the performance of personal services. Service trades or businesses are not considered qualified businesses.

However, even though service trades or businesses are not generally considered qualified businesses, certain service businesses called “specified service trades or businesses” may claim a QBI deduction if the business owner(s)’ taxable income falls within a taxable income phase-out range.  Specified service businesses include those providing services, such as accounting, actuarial science, athletics, brokerage, consulting, financial, health, investment, law, and performing arts.

Qualified Business Income (QBI)

QBI is simply business revenue less business expenses. Because a pass-through business pays no income tax, business expenses will not include income taxes. Any compensation paid by the business to a pass-through business owner is not considered QBI. Compensation includes guaranteed payments to a general partner in a partnership or salary paid to an owner-employee of an S Corporation. For example, a partnership with $500,000 in business income that made guaranteed payments of $200,000 to general partners has a QBI of $300,000.

Calculating the QBI Deduction

The deduction is based upon the type of the pass-through business and the adjusted taxable income of the owner. The deduction is calculated differently for the owners of SSTBs than for owners of qualified businesses.

In this blog, we will focus upon owners of SSTBs. The QBI deduction for the owner of an SSTB is:

  • The lesser of 20% of the QBI base or the owner’s adjusted taxable income IF the owner’s adjusted taxable income is below a phase-out range, or
  • $0 if adjusted taxable income is above a phase-out range.

Adjusted taxable income is taxable income on Form 1040 excluding capital gains, interest income or dividend income. The QBI base is QBI of the business plus REIT dividends received plus Publicly Traded Partnership (PTP) Income received.


Jack and Nanette are unrelated taxpayers and own unrelated pass-through businesses.

Nanette files as a single taxpayer and is the sole owner of a specified service trade or business (SSTB).

  • She has QBI of $100,000, received REIT dividends of $20,000, and received PTP income of $30,000. Her QBI base is $150,000.
  • She has adjusted taxable income on her personal income tax return before the QBI deduction of $160,000. She has no interest income, dividend income, or capital gains.

Jack files as a single taxpayer and is the sole owner of an SSTB.

  • He has QBI of $125,000, received no REIT dividends, and received no PTP income. His QBI base is $125,000.
  • He has taxable income on his personal income tax return before the QBI deduction of $120,000, including $20,000 in long-term capital gains. His adjusted taxable income is $100,000 after excluding the capital gains.

Nanette’s and Jack’s QBI deductions are calculated as follows:

QBI base = Qualified Business Income + REIT dividends + PTP income $150,000 $125,000
Owner’s adjusted taxable income =  taxable income – capital gains. $160,000 $100,000
QBI deduction = 20% of the lesser of the QBI base or adjusted taxable income. $30,000 $20,000

Phase-Out Range

In the example above, both Jack and Nanette were eligible for a QBI deduction because their adjusted taxable income was below the lower limit of the following phase-out range:

Adjusted Taxable Income Phase-out Range $329,800 - $429,800 $164,900 - $214,900 $164,900 -$214,900

However, if adjusted taxable income had been greater than the upper limit of the phase-out range, the QBI deduction would have been zero.

In this blog, we illustrated the QBI deduction for a business that was not a qualified business but was eligible for the QBI deduction under the SSTB exception. Stay tuned for our next blog in this series in which we will go through this same regimen for the owner of a qualified business.


The information presented herein is provided purely for educational purposes and to raise awareness of these issues; it is not meant to provide and should not be used to provide legal, compliance or financial advice.  There are variations, alternatives, and exceptions to this material that could not be covered within the scope of this blog.