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The Section 199A Deduction: How It Works and Illustrative Examples

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The Section 199A Deduction: How It Works
June 10, 2020February 10, 2023
and Illustrative Examples
Gary Guenther
Congress made numerous changes to the Congress made numerous changes to the federal tax code fortaxation of individuals and corporate and individuals and corporate and
noncorporate Analyst in Public Finance Analyst in Public Finance
noncorporate businesses in December 2017,businesses as part of P.L. 115-97 (commonly known as the Tax Cuts and Jobs Act or TCJA). Among those changes as part of P.L. 115-97 (referred to in this report as

the 2017 tax revision but also known as the Tax Cuts and Jobs Act). At the core of the law was a was a
permanent cut in the corporate income tax rate from a top rate of permanent cut in the corporate income tax rate from a top rate of 35% in a graduated rate structure35% to a to a flatsingle rate of 21%. rate of 21%.

During the congressional debate over the During the congressional debate over the 2017 tax revisionTCJA, pass-through business owners sought tax relief comparable to , pass-through business owners sought tax relief comparable to
any reduction any reduction in corporate tax rates included in the bill. In response, Congress added a new deduction for pass-through business under Internal Revenue Code (IRC) Section 199A. Like most of the individual income tax changes in P.L. 115-97, the IRCin corporate tax rates. Heeding this request, Congress added a new deduction under Section 199A of the federal
tax code. The deduction allows pass-through business owners to deduct up to 20% of their qualified business income (QBI)
in determining their personal tax liability. This reduces effective tax rates for pass-through business profits by up to 20%.
Like most of the changes in the individual income tax in P.L. 115-97, the new Section 199A deduction is temporary: it is Section 199A deduction is temporary: it is
available from 2018 to 2025. available from 2018 to 2025.
In general,IRC Section 199A allows individuals, trusts, and estates with pass-through business income to deduct up to 20% of Section 199A allows individuals, trusts, and estates with pass-through business income to deduct up to 20% of
their QBItheir qualified business income (QBI) from their taxable from their taxable ordinary income. (Owners of certain agricultural or horticultural cooperatives, real estate investment income. (Owners of certain agricultural or horticultural cooperatives, real estate investment
trusts, and publicly traded partnerships are also eligible for the deduction, but trusts, and publicly traded partnerships are also eligible for the deduction, but t hey aretheir use of it is not covered in this report.) A pass- not covered in this report.) A pass-
through business owner’s QBI is the net amount of items of income, loss, gain, and deduction for through business owner’s QBI is the net amount of items of income, loss, gain, and deduction for eacha qualified domestic qualified domestic
trade or businesstrade or business he or she owns. If a taxpayer owns more than one business, then . If a taxpayer owns more than one business, then QBI must be determined separately for
each one and added together to determine the taxpayer’s total QBI in a tax year.
the taxpayer’s total QBI in a year is the sum of the QBIs for all businesses. The The maximum deduction is the lesser of is the lesser of
 20% of an owner’s QBI, or  20% of an owner’s QBI, or
 20% of taxable income, excluding any net capital gains.  20% of taxable income, excluding any net capital gains.

Two Two other limitations may apply, reducing the amount of the deduction:
limitations that reduce the maximum deduction may apply:   Wage and qualified property limitation (WQP), which reduces the maximum deduction (WQP), which reduces the maximum deduction an owner may
claim according to theaccording to a formula based on an owner’s share of a business’s W-2 wages and the unadjusted basis (or original cost) owner’s share of a business’s W-2 wages and the unadjusted basis (or original cost)
of its qualified assets); and of its qualified assets); and
  Specified Service Trade or Business ( (SSTB) limitation, which reduces the maximum deduction an , which reduces the maximum deduction an owner
SSTB owner may claim for may claim for qualified income from SSTBsQBI. An SSTB is any trade or business . An SSTB is any trade or business that is involved in the
performance of services in the fields of accounting, health, law, involved in accounting; health care; law; actuarial scienceactuarial science,; athletics athletics,; brokerage brokerage
services,services; consulting consulting,; financial services financial services, or; the performing arts; the performing arts; or involved in the performance of services in
investing and investment managementinvesting and investment management, trading,; or dealing in securities, partnership interests, or or dealing in securities, partnership interests, or
commodities; orcommodities. An SSTB can also be a business whose principal asset is the reputation or skill of one or more of a firm’s owners or whose principal asset is the reputation or skill of one or more of a firm’s owners or
employees. employees.
The SSTB and WQP limitations phase in The SSTB and WQP limitations phase in, reducing the maximum deduction, when the owner’s income exceeds a lower when the owner’s income exceeds a lower
income threshold. Their full impact is realized when taxable income exceeds an upper income threshold.
This report illustrates how the deduction amount is calculated in various scenarios that illustrate the mechanics of the WQP
limitations and the SSTB limitation, and the interaction of these limits when applicable.
income threshold ($364,200 for joint filers and $182,100 for other filers in 2023). Their full impact is realized when taxable income exceeds an upper income threshold ($464,200 for joint filers and $232,100 for other filers in 2023). This report provides a brief overview of the deduction and several examples of how it is calculated in the presence of the WQP and SSTB limitations.
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Contents
StructureOverview of the Section 199A Deduction ....................................................................................... 1
Who Qualifies for the Deduction? ............................................................................................ 1
What Is a Specified Service Trade or Business? ................................................................. 2
What Income Qualifies for the Deduction? ............................................................................... 2
Do Any Limits Apply to the Deduction? ................................................................................... 3
WQP Limitation .................................................................................................................. 4
SSTB Limitation ................................................................................................................. 4

Five Basic Scenarios ....................................................................................................................... 5 Scenario 1 5
First Scenario: Taxable Income Below the Deduction’s Lower Income Threshold for SSTB and
Non-SSTB Qualified Income .................................................................................... 6
Second Scenario 5 Scenario 2: Taxable Income Above the Upper Income Threshold for SSTB QBI only ............ 6 Scenario 3: Taxable Income Above the Upper Income Threshold for SSTB
Qualified Income OnlyLimitation for Non-SSTB QBI only ............................................................................................ 6
Third Scenario: Taxable Income Above the Upper Income Limitation for Non-SSTB
Qualified Income .................................................................................................... 6
Fourth Scenario 6 Scenario 4: Taxable Income Within the Phase-in Range for the WQP Limit for
Non-SSTB Qualified Income SSTB and WQP Limits for Non-SSTB QBI only ...................................................................................... 7
Fifth Scenario....... 6 Scenario 5: Taxable Income Is Within the Phase-in Range for the SSTB and WQP
Limitations for SSTB Qualified Income Only ....................................................................... 7
Net Operating Losses and the IRC 199A Deduction ..................................................................... 10

Tables
Table 1. Lower and Upper Income Thresholds for the SSTB and WQP Limitations for the
Section 199A Deduction ............................................................................................................... 4
Table 2. Summary of Five Scenarios for Claiming the Section 199A Deduction ............................................................................................... 8

Appendixes
Appendix. Final Regulations (TD 9847) on Classifying Businesses as an SSTB .......................... 11

Contacts
Author Information ........................................................................................................................ 12

Congressional Research Service Congressional Research Service


The Section 199A Deduction: How It Works and Illustrative Examples

ongress made numerous changes to the ongress made numerous changes to the federal tax code fortaxation of individuals and corporate and individuals and corporate and
noncorporate businesses in December 2017, as part of P.L. 115-97 (noncorporate businesses in December 2017, as part of P.L. 115-97 (referred to in this
C report as the 2017 tax revision but also known as the Tax Cuts and Jobs Act).1 At the core
of the lawcommonly known as C the Tax Cuts and Jobs Act or TCJA).1 A key change was a permanent cut in the corporate was a permanent cut in the corporate income tax rate from a top rate of 35%income tax rate from a top rate of 35% within a graduated corporate tax rate structure to a single to a flat
rate of 21%. rate of 21%.
During the congressional debate over the During the congressional debate over the 2017 tax revisiontax bill, pass-through business owners sought , pass-through business owners sought
tax relieftax relief comparable to any reduction in corporate tax ratescomparable to any reduction in corporate tax rates.2 Heeding this request, included in the legislation.2 In response, Congress Congress
added a new deduction added a new deduction under Section 199A of the federal tax code. The deduction al owsfor pass-through businesses under Internal Revenue Code (IRC) Section 199A. The deduction allows pass- pass-
through business owners to deduct up to 20% of their qualified business income (QBI) in through business owners to deduct up to 20% of their qualified business income (QBI) in
determining their personal tax liability. This reduces effective tax rates for pass-through business
profits by up to 20%determining their individual income tax liability. Like most of the changes in the individual income tax in P.L. 115-97, the . Like most of the changes in the individual income tax in P.L. 115-97, the
new Section 199A deduction is temporary: it is availableSection 199A deduction is temporary: it is available from 2018 to 2025. from 2018 to 2025.
This report This report examines how the deduction is calculated. It includes several stylized examples
intended to il ustrate the deduction’s impact in several likely scenarios.
Structureprovides a brief overview of the deduction and examples of how it is calculated in five basic scenarios. Overview of the Section 199A Deduction
In general, betweenBetween 2018 and 2025, 2018 and 2025, IRC Section 199A Section 199A al owsallows individuals, trusts, and estates with individuals, trusts, and estates with
income from pass-through businesses to deduct up to 20% of their QBI in determining their income from pass-through businesses to deduct up to 20% of their QBI in determining their
federal tax liability.federal tax liability. (Owners of certain agricultural or horticultural cooperatives, real estate (Owners of certain agricultural or horticultural cooperatives, real estate
investment trusts [REITs], and publicly traded partnerships [PTPs] are also eligible for the investment trusts [REITs], and publicly traded partnerships [PTPs] are also eligible for the
deduction, but deduction, but they aretheir use of it is not covered in this report.) not covered in this report.) Key considerations in claiming the deduction
are
 the pass-through business owner’s taxable income,
 the nature of pass-through businesses owned by high-income persons, and
 the owner’s share of W-2 wages and the original cost of qualified assets from the
business.
The deduction may be claimed on Form 1040, after eligible taxpayers take the standard deduction
or the sum of their itemized deductions.3
Who Qualifies for the Deduction?
General y, theThe deduction may be claimed on the Form 1040, after eligible taxpayers take the standard deduction or the sum of their itemized deductions.3 Several considerations are key in claiming the deduction:  a pass-through business owner’s adjusted gross income (AGI),  the nature of a pass-through business, and  an owner’s share of a business’s W-2 wages and the original cost of its qualified assets. Who Qualifies for the Deduction? The IRC Section 199A deduction applies to a broad range of business activities. The Section 199A deduction applies to a broad range of business activities. The deduction’s final final
regulations for the Section 199A deduction (Treasury Decision, or TD, 9847) defineregulations (Treasury Decision [TD] 9847) specify that a trade or a trade or
business business as havingunder IRC Section 199A has the same meaning as a trade or business under Section 162.4 An activity the same meaning as a trade or business under Section 162.4 An activity
qualifies as qualifies as aan IRC Section 162 business if it is conducted with continuity, regularity, and the Section 162 business if it is conducted with continuity, regularity, and the intent of earning a profit. Such an activity can be done on a full-time or part-time basis. In the intent of

1 For more details on those changes, see CRS1 For more details on those changes, see CRS Report R45092, Report R45092, The 2017 Tax Revision (P.L. 115-97): Comparison to
2017 Tax Law
, coordinated by Molly F. Sherlock and Donald J. Marples. , coordinated by Molly F. Sherlock and Donald J. Marples.
2 For example, see Brian Faler, “What You Need to Know about the Senate’s Pass-through 2 For example, see Brian Faler, “What You Need to Know about the Senate’s Pass-through T axTax Debate” Debate” Politico, ,
November 28, 2017, at https://www.politico.com/story/2017/11/28/whatNovember 28, 2017, at https://www.politico.com/story/2017/11/28/what -is-pass-through-tax-debate-senate-192470. -is-pass-through-tax-debate-senate-192470.
3 See 3 See CRS CRS Infographic IG10014, Infographic IG10014, The U.S. Individual Income Tax System, 2019, by Molly F. Sherlock. , by Molly F. Sherlock.
4 U.S.4 U.S. Department of the Department of the T reasuryTreasury, Internal Revenue Service, “Qualified, Internal Revenue Service, “Qualified Business Business Income Deduction,” Final Income Deduction,” Final
Regulations, Regulations, T DTD 9847, 9847, 84 Federal Register, February 8, 2019, pp. 2952-3013. , February 8, 2019, pp. 2952-3013. T heThe final regulations for the deduction, final regulations for the deduction,
issuedissued by the IRSby the IRS on January 18, 2019, in on January 18, 2019, in T DTD 9847, addressed these questions 9847, addressed these questions and several others. and several others. T DTD 9847 represented 9847 represented
the culmination of a process that commenced on August 16, 2018, when the IRSthe culmination of a process that commenced on August 16, 2018, when the IRS released released proposed regulations for proposed regulations for
Section 199A (REG-107892-18) and included a publicSection 199A (REG-107892-18) and included a public hearing on October 16, 2018. hearing on October 16, 2018. T heThe IRS received 335 comments IRS received 335 comments
in response to its proposed rulemaking. in response to its proposed rulemaking.
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earning a profit. Such an activity can be done full-time or part-time. In the case of the case of the IRC Section Section
199A deduction, there are two basic kinds of trades and businesses: a specified service trade or 199A deduction, there are two basic kinds of trades and businesses: a specified service trade or
business (SSTB) and a non-specified service trade or business (non-SSTB). business (SSTB) and a non-specified service trade or business (non-SSTB).
What Is a Specified Service Trade or Business?
According toIRC Section 199A(d)(2) Section 199A(d)(2), a specified service trade or business (SSTB) specifies that an SSTB is any trade or is any trade or
business that business that is
 involved in the performance of services in the fields of  provides services in accounting, health, law, accounting, health, law,
actuarial science, athletics, actuarial science, athletics, brokerage services, consulting, financial services, or brokerage services, consulting, financial services, or
the performing arts; or the performing arts; or
  involved in the performance ofprovides services in investing and investment services in investing and investment
management, trading, or dealing in management, trading, or dealing in securities, partnership interests, or securities, partnership interests, or
commodities; or commodities; or
  whose principal asset isderives much of its income from the reputation or the reputation or skil skill of one or more of a of one or more of a firm’s owners firm’s owners
or employees. or employees.
This list largely matches the list ofThere is considerable overlap between SSTBs and businesses that do not qualify for a businesses that do not qualify for a 50% to 100% tax exclusion tax exclusion
for long-term capital gainsfor long-term capital gains that owners realize on the sale or exchange of qualified smal business
stock, under Section 1202. A number of requirements must be met in order to benefit from this
exclusion.
Section 1202(e)(3)(A) identifies the businesses that are eligible for the exclusion by listing the
ineligible businesses, which are
any trade or business involving the performance of on the sale or exchange of qualified small business stock under IRC Section 1202. According to IRC Section 1202(e)(3)(A), qualified stock issued by these businesses is ineligible for the gains exclusion: any trade or business involving the performance of services in the fields of health, law, services in the fields of health, law,
engineering, architecture,engineering, architecture, accounting, actuarial science,accounting, actuarial science, performing arts, consulting, performing arts, consulting,
athletics, financial services, brokerage services, or any trade or business where the principal athletics, financial services, brokerage services, or any trade or business where the principal
asset of such trade or business is the reputation or skill of one or more of its employees. 5 asset of such trade or business is the reputation or skill of one or more of its employees. 5
There is at least one difference between SSTBs and businesses not eligible for the There is at least one difference between SSTBs and businesses not eligible for the IRC Section 1202 Section 1202
gains exclusion. gains exclusion. Engineering and architecture are not included inFor a reason that is not clear from IRC Section 199A’s legislative history, engineering services and architecture are excluded from the list of SSTBs, making them the list of SSTBs, making them
eligible for the Section 199Aeligible for the deduction, regardless of deduction, regardless of thean owner’s taxable income. Under owner’s taxable income. Under IRC Section Section
1202, by contrast, 1202, by contrast, the two industries are among those deemedthose two professional services are ineligible for ineligible for capitalthe gains exclusion. Since SSTBs generally are professional service firms whose success may stem from the skills gains tax
relief. In general, SSTBs can be described as professional service firms whose success rests on
the skil s and reputation of their owners and employees and reputation of their owners and employees. It can be argued that many, it is difficult to understand why engineering engineering
and architecture firms fit that description, and thus should be classified as SSTBs.
The criteria for identifying an SSTB are not necessarily mutual y exclusive. Many professional
service firms considered an SSTB based on their primary line of business (e.g., accounting or
law) may also have as a principal asset the reputation and skil s of owners and employees.
The final regulations for the deductionand architecture firms are not classified as SSTBs. The deduction’s final regulations addressed several complicated issues regarding the addressed several complicated issues regarding the
classification of a business as an SSTB. Those issues are discussed in tclassification of a business as an SSTB. Those issues are discussed in the Appendix.
What Income Qualifies for the Deduction?
The deduction a pass-through business owner may claim The deduction a pass-through business owner may claim is based, in large part,depends partly on the owner’s on the owner’s
QBI. QBI. IRC Section 199A defines QBI as the net amount of items of income, deduction, loss, and gain Section 199A defines QBI as the net amount of items of income, deduction, loss, and gain
for each qualified for a pass-through businesspass-through business someone owns. Only income items connected with a . Only income items connected with a

5 Other businesses are ineligible for the small business stock gains exclusion, but they are not considered SST Bs under
Section 199A. T hese businesses include farming, banking, insurance, leasing, investing, restaurants, and lodging.
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The Section 199A Deduction: How It Works and Illustrative Examples

trade or business conducted in the United States or Puerto Rico can be used to compute QBI. In
claiming the deduction, owners are required to determine QBI separately for each trade or
business in which they have an ownership interest. trade or business conducted in the United States or Puerto Rico can be used to compute a firm’s QBI. If someone owns more than one pass-through businesses, the owner is required to determine the QBI separately for each trade or business. Under certain conditions, an owner of multiple pass-through businesses is allowed to combine (or “aggregate”) those businesses, even if they are conducted as separate legal entities, in determining the owner’s QBI.6 5 Other businesses are ineligible for the small business stock gains exclusion, but they are not considered SSTBs under Section 199A. These businesses include farming, banking, insurance, leasing, investing, restaurants, and lodging. 6 First, a taxpayer must prove that the same person (or group of persons) directly or indirectly owns 50% or more of each trade or business to be combined. Second, the ownership structure has to be maintained for a majority of a tax Congressional Research Service 2 link to page 7 The Section 199A Deduction: How It Works and Illustrative Examples QBI does not include (1) wage income; (2) QBI does not include (1) wage income; (2)
reasonable compensation received by an S corporation shareholder for services provided to the reasonable compensation received by an S corporation shareholder for services provided to the
business; (3) guaranteed payments to a partner for services provided to a partnership; and (4) business; (3) guaranteed payments to a partner for services provided to a partnership; and (4)
investment income unrelated to a trade or business. investment income unrelated to a trade or business.
Owners of multiple pass-through businesses, some of which might be SSTBs, are al owed to
combine (or “aggregate”) those businesses, even if they are conducted as separate legal entities,
in determining their QBI. This treatment is permitted under certain conditions.6
Do Any Limits Apply to the Deduction?
ThereDo Any Limits Apply to the Deduction? Technically, there are three limitations on the deduction are three limitations on the deduction, one of which. One applies to applies to every claim for the claim for the
deductiondeduction.7 A key consideration in determining whether, while the other two the other two limitations apply isapply only if a pass- a pass-
through business owner’s taxable income. Under the Section 199A deduction, taxable income is
defined as a taxpayer’s adjusted gross income (AGI) less al owable deductions, except for the
Section 199A deduction.
The limitation that applies to every claim for the deductionthrough business owner’s AGI exceeds a specified amount.7 The unavoidable limitation is an is an overall cap on the deduction a a
business owner may take in a tax business owner may take in a tax year. This can be referred toyear, a cap that can be thought of as the as the maximum deduction. It is the . It is the
lesser of lesser of
 the sum of 20% of  the sum of 20% of QBI for each qualified trade or businessan owner’s QBI and (if applicable) and (if applicable)
20% of 20% of any REIT REIT dividends and PTP incomedividends and PTP income the owner receives, or , or
 20% of a taxpayer’s taxable income, less any net capital gain, which is equivalent  20% of a taxpayer’s taxable income, less any net capital gain, which is equivalent
to an owner’s taxable ordinary income. to an owner’s taxable ordinary income.
Two other limitations may apply Two other limitations may apply, depending on taxable income:
Wage:  a wage and qualified property limitation (WQP), which reduces the maximum (WQP), which reduces the maximum
deduction an owner may claim according to the owner’s share of a business’s W- deduction an owner may claim according to the owner’s share of a business’s W-
2 wages and the unadjusted basis (or original cost) of its qualified assets;8 and 2 wages and the unadjusted basis (or original cost) of its qualified assets;8 and
  an SSTB limitation, which reduces the maximum deduction an owner may , which reduces the maximum deduction an owner may claim
for qualified income from SSTBs.

6 First, a taxpayer must prove that the same person (or group of persons) directly or indirectly owns 50% or more of
each trade or business to be combined. Second, the ownership structur e has to be maintained for a majority of a tax
year, including the last day. Finally, taxable items attributable to each trade or business to be combined have to be
reported on returns for the same tax year. Aggregation is not allowed for SST Bs. T rades or businesses claim for SSTB QBI. The SSTB and WQP limitations do not apply to the 20% deduction for REIT and PTP income. They phase in if a pass-through business owner’s income exceeds the deduction’s lower income threshold ($364,200 for joint filers and $182,100 for other filers in 2023). Their full impact is realized when an owner’s AGI exceeds an upper income threshold ($464,200 for joint filers and $232,100 for other filers in 2023). Table 1 shows the lower income and upper income thresholds for both limitations from 2018 to 2023; the amounts have been indexed for inflation starting in 2019. More details on the potential impact of the two limitations are provided below. year, including the last day. Finally, taxable items attributable to each trade or business to be combined have to be reported on returns for the same tax year. Aggregation is not allowed for SSTBs. Trades or businesses to be aggregated to be aggregated
must satisfy at least two of the following three conditions: (1) they provide goods and services that are the same or must satisfy at least two of the following three conditions: (1) they provide goods and services that are the same or
usuallyusually sold sold together; (2) they share facilities or key businesstogether; (2) they share facilities or key business elements, such as personnel, accounting, elements, such as personnel, accounting, lega llegal, ,
manufacturing, purchasing, human resources, or information technology; or (3) they are operated in connection with manufacturing, purchasing, human resources, or information technology; or (3) they are operated in connection with
one or more of the other businessesone or more of the other businesses in the combined group. in the combined group.
7 This7 T his discussion discussion of the limitations for the Section 199A deduction is basedof the limitations for the Section 199A deduction is based o n on a detailed explanation of how the a detailed explanation of how the
deduction works given in a report by the Joint Committee on Taxation. See Joint Committee on deduction works given in a report by the Joint Committee on Taxation. See Joint Committee on T axationTaxation, , Overview of
Deduction for Qualified Business Incom eIncome: Section 199A
, March 13, 2019, https://www.jct.gov/publications.html?func=, March 13, 2019, https://www.jct.gov/publications.html?func=
startdown&id=5171. startdown&id=5171.
8 W-2 wages 8 W-2 wages are a firm’s total wagesare a firm’s total wages subject subject to withholding, elective deferrals, and deferred compensation. to withholding, elective deferrals, and deferred compensation.
T he unadjusted basis The unadjusted basis of qualifiedof qualified property refers to the cost of tangible, depreciable assets when a pass-through firm property refers to the cost of tangible, depreciable assets when a pass-through firm
acquiresacquires them. them. T heThe property must be depreciable under property must be depreciable under Section 167 of the federal tax code, usedSection 167 of the federal tax code, used in a qualifiedin a qualified business business
at the close of the tax year for which the Section 199A deduction isat the close of the tax year for which the Section 199A deduction is claimed, and have a “claimed, and have a “ depreciable period” that does depreciable period” that does
not end before the close of that year. Under Section 199A, that period ends either 10 years after a depreciablenot end before the close of that year. Under Section 199A, that period ends either 10 years after a depreciable asset is
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The SSTB and WQP limitations do not apply to the deduction for REIT and PTP income. The
SSTB and WQP limitations phase in, reducing the maximum deduction, when the owner’s
income exceeds a lower income threshold. Their full impact is realized when taxable income
exceeds an upper income threshold. Table 1 shows the lower income and upper income
thresholds for both limitations from 2018 to 2020; the amounts are indexed for inflation. More
details on the potential impact of the two limitations are provided below. asset is first placed in service, or on the last day of the last full year of the cost recovery period for the asset under Section 168. Special considerations apply to S corporations and partnerships in determining an owner’s allocable share. Congressional Research Service 3 The Section 199A Deduction: How It Works and Illustrative Examples
Table 1. Lower and Upper Income Thresholds for the SSTB and WQP Limitations
for the Section 199A Deduction
Tax Year
Lower Income Threshold
Upper Income Threshold
All Other
All Other

Tax Year Joint Filers
Filers
Joint Filers
Filers
2018 2018
$315,000 $315,000
$157,500 $157,500
$415,000 $415,000
$207,500 $207,500
2019 2019
$321,400 $321,400
$160,700 $160,700
$421,400 $421,400
$210,700 $210,700
2020 2020
$326,600 $326,600
$163,300 $163,300
$426,600 $426,600
$213,300 $213,300
Source: P.L. 115-97 and IRS Procedures 18-57 and 19-44.
Notes: Al other filers are single and head-of-household filers and married 2021 $329,800 $164,900 $429,800 $214,900 2022 $340,100 $170,050 $440,100 $220,050 2023 $364,200 $182,100 $464,200 $232,100 Source: P.L. 115-97 and IRS Revenue Procedures 2018-57, 2019-44, 2020-45, 2021-45, and 2022-38. Notes: All other filers are single and head-of-household filers and married persons filing as a single person. The persons filing as a single person. The
amounts for 2019 and amounts for 2019 and 20202023 have been indexed for inflation. have been indexed for inflation.
WQP Limitation
This This limit on the deductionlimitation is tied to a pass-through business owner’s share of a business’s W-2 is tied to a pass-through business owner’s share of a business’s W-2
wages and the original cost of its tangible, depreciable assets. Three outcomes are possible wages and the original cost of its tangible, depreciable assets. Three outcomes are possible when
if the WQP limitthe WQP limit applies to the deduction and QBI is from applies to the deduction and QBI is from a non-SSTB non-SSTB business only. (The scenario
when both the WQP limit and SSTB limit apply is discussed subsequently.)
businesses only. (1) An owner’s taxable incomeAGI is less than the lower income threshold:: in this case, the in this case, the
maximum deduction may be claimed. maximum deduction may be claimed.
(2) An owner’s taxable income isAGI falls in the phase-in range for the WQP limit: in this case,in this case, the the
maximum maximum deduction anddeduction is calculated and compared with the deduction with the full WQP limit the deduction with the full WQP limit are calculated and compared. The . The
difference between difference between thesethe two deductions is multiplied by two deductions is multiplied by thea reduction percentage (RP, see below
for more details) to determine to determine thea reduction reduction amount. This reduction amountamount, which is subtracted from the is subtracted from the
maximum deduction to determine the deduction maximum deduction to determine the deduction the amount an owner may claim.owner may claim.9
(3) An owner’s taxable income exceeds the upper income threshold: in this case, the in this case, the
deduction is subject to the full WQP limit. As a result, the deduction cannot exceed the greater of deduction is subject to the full WQP limit. As a result, the deduction cannot exceed the greater of
50% of the owner’s share of W-2 wages for a business, or 25% of those wages plus 2.5% of the 50% of the owner’s share of W-2 wages for a business, or 25% of those wages plus 2.5% of the
owner’s share of the unadjusted basis of qualified property used in the business. owner’s share of the unadjusted basis of qualified property used in the business.
SSTB Limitation
This limitation This limitation applies to the deduction claimed by an SSTB owner whose taxable income applies if an owner’s AGI is is
greater than the lower income threshold. There are four basic outcomesgreater than the lower income threshold. There are four basic outcomes when this limit applies: :
(1) An owner’s taxable incomeAGI is less than the lower income threshold:: in this case, the
the maximum deduction may be maximum deduction may be claimed. 9 The deduction’s reduction percentage (RP) reflects the degree to which an owner’s AGI exceeds the lower income threshold. For example, if an owner were a joint filer with an AGI of $400,000 in 2023, his/her RP would be 35.8%: $400,000 in AGI less $364,200 lower income threshold equals $35,800, and that amount divided by the $100,000 phase-in range for joint filers is equal to 0.358, or 35.8%. As a formula, RP = (AGI – lower income threshold/ $100,000 for joint filers or $50,000 for other filers) x 100. claimed.

first placed in service, or on the last day of the last full year of the cost recovery period for the asset under Section 168.
Special considerations apply to S corporations and partnerships in determining an owner’s allocable share.
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(2) An owner’s AGI falls in the phase-in range but only the SSTB limit applies:
(2) An owner’s taxable income is between the lower and upper income thresholds (also
known as the phase-in range for the SSTB limitation) and only the SSTB limit applies:
in
this case, the maximum deduction is reduced by a phased-in SSTB limit. the maximum deduction is reduced by a phased-in SSTB limit. As shown in Table 1,
the The phase-in range for both the SSTB and WQP limits in phase-in range for both the SSTB and WQP limits in 2020 is $326,600 to $426,6002023 is $364,200 to $464,200 for joint for joint
filersfilers, (a range of $100,000a range of $100,000;), and $ and $163,300 to $213,300 for al 182,100 to $232,100 for other filersother filers, (a range of $50,000a range of $50,000). .
When a pass-through business owner’s When a pass-through business owner’s taxable income fal sAGI falls within within thateither range, the maximum range, the maximum
deduction is reduced according to a formula deduction is reduced according to a formula derived, in large part, frombased on the extent to which the the extent to which the
owner’s owner’s taxable incomeAGI exceeds the lower income threshold. This excess is divided by $100,000 exceeds the lower income threshold. This excess is divided by $100,000
for joint filersfor joint filers, or and $50,000 for $50,000 for al all other filers, to determine the other filers, to determine the RP.9 In this outcome, thededuction’s RP. So if only the SSTB limitation applies, an owner’s owner’s
QBI from an SSTB is first reduced by an amount equal to (QBI x RP), and QBI from an SSTB is first reduced by an amount equal to (QBI x RP), and then the deduction the deduction is then
calculated asequals 20% of 20% of thisthe reduced QBI. reduced QBI.
(3) An owner’s taxable incomeAGI lies in the phase-in range and the SSTB and WQP limits both
apply:
in this case, the maximum deduction is reduced the maximum deduction is reduced in two steps: first by a phased-in SSTB first by a phased-in SSTB
limit, and then by a phased-in WQP limit.limit, and then by a phased-in WQP limit.
The first step is to reduce the owner’s QBI from an SSTB and his/her share of a business’s W-2 The first step is to reduce the owner’s QBI from an SSTB and his/her share of a business’s W-2
wages and the unadjusted basis of its qualified property, by the RP.wages and the unadjusted basis of its qualified property, by the RP.10 For example, if an owner’s For example, if an owner’s
taxable income is 90% of the way through the phaseout range (i.e., $405,000AGI above the lower income threshold is 90% of the phaseout range for a joint filer (i.e., $454,200 for married joint for married joint
filers in filers in 20202023), then the owner’s ), then the owner’s QBI is reduced by 90%. Similarly, the owner’s wageSSTB QBI and the owner’s share of a firm’s W-2 wages and and
the unadjusted basis of unadjusted basis of its qualified property qualified property must also beare each reduced by 90%. These adjustments produce reduced by 90%, resulting in a modified WQP
limit. This produces two possible deductions: two possible deductions:
1.  one equal to 20% of the reduced 20% of the reduced SSTB QBI QBI under the SSTB limit without the modified WQP limit, and without the modified WQP limit, and
2.  one equal to 20% of the reduced 20% of the reduced SSTB QBI QBI under the SSTB limit with the modified WQP limit.with the modified WQP limit.
In the second step, the difference between those two deductions is multiplied by the RP. This In the second step, the difference between those two deductions is multiplied by the RP. This
yields a yields a reduction amount, which is subtracted from the deduction without the WQP limit , which is subtracted from the deduction without the WQP limit ((i.e.,
deduction 1 above) to determine the Section 199A deduction an owner may claim when both deduction 1 above) to determine the Section 199A deduction an owner may claim when both
limits apply.limits apply.
(4) An owner’s taxable incomeAGI exceeds the upper income threshold: in this case, no deduction no deduction
may be claimed, as may be claimed, as the owner’s QBI comes QBI comes entirely from an SSTB. from an SSTB.
Five Basic Scenarios
One way to understand how the One way to understand how the IRC Section 199A deduction is intended to work is to Section 199A deduction is intended to work is to consider how it
would be calculated calculate it under different scenarios. The following five scenarios explore the effects of under different scenarios. The following five scenarios explore the effects of
the SSTB and WQP limits on a single filer with different amounts of the SSTB and WQP limits on a single filer with different amounts of taxable incomeAGI. The results . The results
are summarized iare summarized in Table 12. These stylized examples address only some of the possible scenarios
for claiming the deduction. Stil , they il ustrate the deduction that may be claimed under the three
possible conditions facing2. The scenarios can be regarded as basic in that they illustrate how the deduction is calculated if a pass-through business owner a pass-through business owner: (1) taxable income ’s AGI (1) does not exceed the does not exceed the
lower income threshold; (2) lower income threshold; (2) taxable income fal sfalls in the phase-in range for the two limits; in the phase-in range for the two limits; andor (3) (3)
taxable income exceeds the upper income threshold.

9 For example, if a pass-through business owner has a taxable income of $400,000 and files jointly, then their reduction
percentage would be equal to $400,000 - $326,600/$100,000, or $73,400/$100,000, or 73.4%.
10 For example, if QBI is $200,000, W-2 wages are $50,000, and the RP is 40%, then after applying the RP, QBI is
$120,000 (i.e., $200,000 – ($200,000 x 0.4)), and W-2 wages become $30,000 (i.e., $50,000 – ($50,000 x 0.4)).
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First Scenario: Taxable Income Below the Lower Income Threshold
for SSTB and Non-SSTB Qualified Income
Assume that in 2020
 James owns a restaurant (non-SSTB) as a sole proprietor;11
 he has a taxable income of $160,000, with no net capital gains;
 his filing status is single; and
 QBI for his business totals $140,000.
In this scenario, James’s taxable income ($160,000) is exceeds the upper income threshold. Scenario 1: Taxable Income Below the Deduction’s Lower Income Threshold Assume that in 2023  James owns a restaurant (non-SSTB) as a sole proprietor;  he is a single filer with an AGI of $180,000 and no net capital gains; and  his business’s QBI totals $140,000. Congressional Research Service 5 The Section 199A Deduction: How It Works and Illustrative Examples In this scenario, James’s taxable income ($180,000) is slightly below the lower income threshold for below the lower income threshold for
single filers ($single filers ($163,300 in 2020), and the deduction is not subject to the SSTB and WQP
limitations. The deduction, in this case,182,100 in 2023), which means that he may claim the maximum deduction. So his 2023 deduction is the lesser of 20% of James’s is the lesser of 20% of James’s total QBI, or 20% of his QBI, or 20% of his
ordinary income. Thus, he may claim a Section 199A deduction in 2020 ofordinary income, or $28,000..12
Second Scenario10 Scenario 2: Taxable Income Above the Upper Income
Threshold for SSTB QBI onlySSTB Qualified Income Only
Assume that in Assume that in 20202023
 James is part owner of a law firm (SSTB);  James is part owner of a law firm (SSTB);
  his taxable income is $215,000, withhe is a single filer with an AGI of $245,000 and no net capital gains; and  his SSTB’s QBI is $190,000. Because this no net capital gains;
 his filing status is single; and
 QBI for his SSTB is $190,000.
The second scenario involves a pass-through business owner whose scenario involves a pass-through business owner whose taxable incomeAGI exceeds the exceeds the
deduction’s upper income threshold ($upper income threshold ($213,300232,100) for a single filer in ) for a single filer in 20202023, and whose entire QBI comes from , and whose entire QBI comes from a
SSTB.an SSTB, James may claim James may claim no deduction for that tax year. for that tax year.
Third ScenarioScenario 3: Taxable Income Above the Upper Income
Limitation for Non-SSTB Qualified IncomeQBI only
Assume that in Assume that in 20202023
 James owns a restaurant (non-SSTB) as a sole proprietor;  James owns a restaurant (non-SSTB) as a sole proprietor;
 James’s taxable income totals $220,000, with  he is a single filer with an AGI of $250,000 and no net capital gains;  his QBI comes to $180,000; and  his share of the restaurant’s W-2 wages is $60,000, and his share of the unadjusted basis of its qualified property is $100,000. In this scenario, the QBI is entirely from a non-SSTB, and James’s AGI no net capital gains;
 his filing status is single;
 QBI from his restaurant comes to $180,000; and
 W-2 wages from the business are $60,000, and the unadjusted basis of qualified
property used in the restaurant totals $100,000.
In this scenario, QBI is from a non-SSTB, and taxable income is above the upper income is above the upper income
threshold ($threshold ($213,300232,100) for a single filer in ) for a single filer in 20202023. As a result, the deduction is subject to the . As a result, the deduction is subject to the full
WQP limit, but not WQP limit, but not to the SSTB limit. The deduction James may claim cannot exceed the larger the SSTB limit. The deduction James may claim cannot exceed the larger

11 Restaurants are not SST Bs, so income from his restaurant is eligible for the Section 199A deduction.
12 T hisof 50% of his share of the restaurant’s W-2 wages, or 25% of those wages plus 2.5% of his share of the restaurant’s unadjusted basis of qualified property. In his case, those amounts are $30,000 or $17,500, respectively.11 Thus, James may claim a $30,000 Section 199A deduction for 2023.12 Scenario 4: Taxable Income Within the Phase-in Range for the SSTB and WQP Limits for Non-SSTB QBI only Assume that in 2023  James owns a restaurant (non-SSTB) as a sole proprietor; 10 This amount is the lesser of 20% of his QBI (0.2 x $140,000 = $28,000), and 20% of his ordinary income (0.2 x amount is the lesser of 20% of his QBI (0.2 x $140,000 = $28,000), and 20% of his ordinary income (0.2 x
$$160180,000 = $,000 = $32,000).
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The Section 199A Deduction: How It Works and Illustrative Examples

of these two amounts: 50% of his share of the restaurant’s W-2 wages, or36,000). 11 In this example, 50% of W-2 wages equal $30,000 (i.e., 0.5 x $60,000) and 25% of those wages 25% of those wages
plus 2.5% of his share of the restaurant’s unadjusted basis of qualified property. In his case, those
amounts are $30,000 or $17,500, respectively.13 Thus, James may claim a Section 199A deduction
of $30,000 for 2020.14
Fourth Scenario: Taxable Income Within the Phase-in Range for the
WQP Limit for Non-SSTB Qualified Income
Assume that in 2020
 James owns a restaurant (non-SSTB) as a sole proprietor;
 his taxable income is $200,000, with no net capital gain;
 he files as a single taxpayer;
 QBI from his restaurant business totals $180,000; and
 his share of W-2 wages from the business and the unadjusted basis of qualified
property used in it areplus 2.5% of the unadjusted basis of qualified property equal $17,500 (i.e., (0.25 x $60,000) + (0.025 x 100,000)). 12 The maximum amount of the deduction without the limitation would be $50,000 (i.e., 20% of $250,000). But with the WQP limitation, he can claim only $30,000. Congressional Research Service 6 link to page 9 The Section 199A Deduction: How It Works and Illustrative Examples  he files as a single taxpayer with an AGI of $200,000 and no net capital gains;  his QBI totals $180,000; and  his share of the restaurant’s W-2 wages and the unadjusted basis of its qualified property is $60,000 and $100,000, respectively. $60,000 and $100,000, respectively.
In this scenario, James’s QBI comes entirely from a non-SSTB, and his taxable income is within In this scenario, James’s QBI comes entirely from a non-SSTB, and his taxable income is within
the phase-in range for the SSTB and WQP limits, although only the WQP limit applies. The the phase-in range for the SSTB and WQP limits, although only the WQP limit applies. The
deduction he may claim is the deduction he may claim is the deduction without the WQP limit, reduced by an amount derived
from the difference between the deduction without that limit and the deduction with that limit,
multiplied maximum deduction reduced by the difference between that deduction and the deduction with the full WQP limit, multiplied by James’s RP. by James’s RP.
The first step The first step in determining his deduction is to calculate the RPis to calculate the RP. It, which is equal to James’s taxable is equal to James’s taxable
income less the lower income threshold, divided by $50,000 (the difference between the lower income less the lower income threshold, divided by $50,000 (the difference between the lower
income threshold and the upper income threshold for a single filer). In this case, the RP is income threshold and the upper income threshold for a single filer). In this case, the RP is
73.4%.1535.8%.13 His reduction amount is calculated by multiplying His reduction amount is calculated by multiplying the RP by the difference between the the RP by the difference between the
deduction with no WQP limit and the deduction with the full WQP limit. The deduction with no deduction with no WQP limit and the deduction with the full WQP limit. The deduction with no
limit is $limit is $3640,000,,000,1614 whereas the deduction with the full WQP limit is $30,000. whereas the deduction with the full WQP limit is $30,000.1715 As a result, the As a result, the
reduction amount is $4,404,18 and James may claim a Section 199A deduction of $31,59619 for
the 2020 tax year.
Fifth Scenarioreduction amount is $3,580,16 and the IRC Section 199A deduction that James may claim in 2023 is $36,420.17 Scenario 5: Taxable Income Is Within the Phase-in Range for
the SSTB and WQP Limitations for SSTB Qualified Income
Only Assume that in Assume that in 2020
2023  James is a partner in a law firm (SSTB);  James is a partner in a law firm (SSTB);
 he  he files asis a single filer with an AGI of $200,000 and no net capital gains;  his share of the firm’s QBI a single person;

13 In this example, 50% of W-2 wages equal $30,000 (i.e., 0.5 x $60,000) and 25% of those wages plus 2.5% of the
unadjusted basis of qualified property equal $17,500 (i.e., (0.25 x $60,000) + (0.025 x 100,000)).
14 T he maximum amount of the deduction without the limitation would be $36,000 (i.e., 20% of $180,000). As a result
of the WQP limitation, he can only claim $30,000.
15 $200,000 - $163,300 = $36,000, and $36,000/$50,000 = 0.734.
16 0.20 x $180,000.
17 See footnote 11.
18 $36,000 - $30,000 = $6,000, and $6,000 x 0.734 = $4,404.
19 $36,000 - $4,404 = $31,596.
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 his taxable income is $200,000, with no net capital gains;
 his share of QBI for the firm is $180,000; and is $180,000; and
 his share of the firm’s W-2 wages and the unadjusted basis of the firm’s qualified  his share of the firm’s W-2 wages and the unadjusted basis of the firm’s qualified
property property areis $60,000 and $100,000, respectively. $60,000 and $100,000, respectively.
The fifthThis scenario is the most complicated scenario is the most complicated. It involves of the five because it requires calculating the deduction under calculating the deduction under both the SSTB the SSTB
and the WQP limitsand the WQP limits, since. This is because James’s taxable income is within the phase-in range for both James’s taxable income is within the phase-in range for both limits,
and his entire QBI comes from an SSTB.and his entire QBI comes from an SSTB.
The calculation The calculation entailsinvolves several steps. The first step is to determine his deduction under the several steps. The first step is to determine his deduction under the SSTB limit only. To do so,SSTB
limit. James’s QBI is reduced by an amount equal to his RP multiplied James’s QBI is reduced by an amount equal to his RP multiplied by the QBI. Then the
by his QBI share. The reduced QBI is reduced QBI is multiplied then multiplied by 20% to calculate the deduction he could claim under the SSTB limit by 20% to calculate the deduction he could claim under the SSTB limit
without the WQP limit; in this case, the deduction is $without the WQP limit; in this case, the deduction is $9,576.20
23,112.18 The next step is to determine his deduction with the The next step is to determine his deduction with the phased-in WQP limit. (Because James’s
taxable income lies within the phase-in range for the deduction, his full WQP limit must also be
reduced by the RP.) The deduction James could take under the modified (i.e., phased in) WQP
limit is the greater of 50% of James’s share of W-2 wages multiplied by the RP ($7,980),21 or the
sum of 25% of those wages and 2.5% of James’s share of the WQP limit only, which is the greater of 50% of James’s share of W-2 wages multiplied by his RP ($19,260),19 or the sum of 25% of those 13 $200,000 - $182,100 = $17,900, $17,900/$50,000 = 0.358, and 0.358 x 100 = 35.8%. 14 0.20 x $200,000. 15 See footnote 11. 16 $40,000 - $30,000 = $10,000, and $10,000 x 0.358 = $3,580. 17 $40,000 - $3,580 = $36,420. 18 This is the result of multiplying his RP ($17,500/$50,000 = 35.8%) by his QBI ($180,000), subtracting that amount ($62,440) from his QBI ($180,000) and then multiplying that amount by 20% (0.2 x $115,560 = $23,112). 19 [(0.5 x ($60,000 - ($60,000 x 0.358))] = (0.5 x $38,520) = $19,260. Congressional Research Service 7 link to page 7 link to page 7 The Section 199A Deduction: How It Works and Illustrative Examples wages and 2.5% of share of the law firm’s total unadjusted basis of qualified total unadjusted basis of qualified
property, multipliedproperty, multiplied by the RP ($by the RP ($4,655).2225,680).20 Thus, James’s deduction under the Thus, James’s deduction under the modified WQP limit WQP limit
is $7,980is $25,680. .
In the final step, the difference between the deduction under the SSTB limit without the In the final step, the difference between the deduction under the SSTB limit without the modified
WQP limit ($9,576WQP limit ($23,112) and the deduction under the SSTB limit with the modified WQP limit ) and the deduction under the SSTB limit with the modified WQP limit
($7,980($25,680) is multiplied by James’s RP. The result is subtracted from the deduction with no WQP ) is multiplied by James’s RP. The result is subtracted from the deduction with no WQP
limit ($9,576limit ($23,112) to determine the Section 199A deduction James may claim for the ) to determine the Section 199A deduction James may claim for the 20202023 tax year tax year,
which is $8,405.23
: $20,544.21 This deduction is about This deduction is about 7344% less than the deduction James could claim in the fourth scenario% less than the deduction James could claim in the fourth scenario, which is identical to the fifth scenario regarding James’s
($31,596), even though his taxable income taxable income and QBI, as wel as his, QBI, and share of W-2 wages and share of W-2 wages and
unadjusted basis of qualified propertyunadjusted basis of qualified property, are identical in both cases. The difference reflects the
effect of the SSTB limit in the fifth scenario but not in the fourth.
Table 2. Summary of Five Scenarios for Claiming the Section 199A Deduction
Selected
Service
and
Wage
Trade
/Qualified
Business
Property
(SSTB)
(WQP)a
Taxable Income
Limit
Limit
Deduction
Scenario 1: Single filer
No
No
The deduction is the lesser of
with taxable income below

20% of QBI, or
the lower income
threshold. (See Table 1.)

20 T his is the result of multiplying his RP ($36,000/$50,000 = 73.4%) by his QBI ($180,000), subtracting that amount
($132,120) from his QBI ($180,000) to determine his adjusted QBI ($47,880), and then calculating 20% of that amount
(0.2 x $47,880).
21 [(0.5 x ($60,000 - ($60,000 x 0.734))] = (0.5 x $15,960) = $7,980.
22 [0.25 x ($60,000 – ($60,000 x 0.734))] + [0.025 x ($100,000-($100,000 x 0.734)) = (0.25 x $15,960) + 0.025 x
(26,600) = $3,990 + $665 = $4,655.
23. The difference illustrates the impact of both limits on the allowable deduction when part or all of a pass-through business owner’s QBI comes from an SSTB and the owner’s AGI lies in the phase-in range for the limits. The results of the first three scenarios are not comparable because they are based on differing owner AGIs and QBIs. Table 2. Summary of Five Scenarios SSTB WQPa Limit Limit Deduction Deduction Amount ($) Scenario 1: No No The deduction is the lesser of $28,000 Single filer has  20% of QBI, or adjusted gross income (AGI)  20% of ordinary taxable below the 2023 income less net capital lower income gains. threshold (see (This amount can also be Table 1). referred to as the maximum Qualified deduction.) business income (QBI) comes from an SSTB, a non-SSTB, or both. Scenario 2: Yes No No deduction is allowed $0 Single filer has because QBI is from an SSTB AGI above the only and AGI exceeds the 2023 upper upper income threshold. income threshold (see Table 1). QBI comes from an SSTB only. 20 [0.25 x ($60,000 – ($60,000 x 0.358))] + [0.025 x ($100,000-($100,000 x 0.358)) = ($9,630 + $16,050) = $25,680. 21 [($9,576 - $7,980) x 0.734)] = $1,171, and $9,576 - $1,171 = $8,405. [($9,576 - $7,980) x 0.734)] = $1,171, and $9,576 - $1,171 = $8,405.
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Selected
Service
and
Wage
Trade
/Qualified
Business
Property
(SSTB)
(WQP)a
Taxable Income SSTB WQPa
Limit
Limit
Deduction
Total qualified business

20% of taxable income less any net capital gain (or
income (QBI) from a SSTB
20% of ordinary income).
and/or a non-SSTB.
(This amount is also referred to as the maximum
deduction).
Deduction Amount ($) Scenario 2: Single filer
Yes3: No
Yes Yes
NoThe deduction is the least of $30,000 Single filer has  20% of QBI, AGI above the 2023 upper  20% of ordinary income, income or threshold (see deduction is al owed because QBI is from a SSTB and
with taxable income above
taxable income exceeds the upper income threshold.
the upper income
threshold. (See Table 1.)
QBI from a SSTB only.
Scenario 3: Single filer
No
Yes
The deduction is the lesser of
with taxable income above

20% of QBI or 20% of ordinary income, or
the upper income
threshold. (See Table 1.)

the deduction with the ful WQP limit.
QBI from  the deduction with the ful Table 1). WQP limit. QBI comes from a non-SSTB a non-SSTB
only. only.
Scenario 4: : Taxable
No No
Yes Yes
The maximum The maximum deduction is deduction is $36,420 Single filer’s AGI reduced by an amount equal reduced by an amount equal
to is within the the reduction percentage (RP)b phase-in range multiplied by the difference for the SSTB and between the deduction without WQP limitations the WQP limit and the (see Table 1). deduction with the ful limit. QBI is from a income is within the
to the RPb multiplied by the difference between the
phase-in range for the
deduction without the WQP limit and the deduction
SSTB and WQP
with the ful limit.
limitations. (See Table 1.)
QBI is from a non-SSTB non-SSTB
only. only.
Scenario 5: : Taxable
Yes Yes
Yes Yes
The deduction is determined in three steps.
income is within the
First, the SSTB limit is applied. In this case, the deduction
phase-in range for the
equals 20% of a reduced QBI. This reduced QBI equals
SSTB and WQP
QBI less QBI multiplied by the RPb.
limitations. (See Table 1.)
Second, the WQP limit is applied. In this case, the
QBI is from an SSTB only.
deduction cannot exceed the greater of 50% of an
owner’s share of adjusted wages or 25% of adjusted
wages plus 2.5% of adjusted An owner’s deduction is $20,544 Single filer’s calculated in three steps. taxable income First, the SSTB limit is applied. is within the The deduction equals 20% of a phase-in range reduced QBI, which equals QBI for the SSTB and less QBI multiplied by the RP.b WQP limitations (see Table 1). Second, the WQP limit is applied. The deduction cannot QBI is from an exceed the greater of 50% of an SSTB only. owner’s share of a business’s adjusted wages or 25% of such wages plus 2.5% of the owner’s share of its adjusted qualified property. Adjusted wages property. Adjusted wages
are a business’s W-2 wages lessare a business’s W-2 wages less those wages multiplied those wages multiplied
by the by the RP. Adjusted property is RP. Adjusted property is an owner’s share of the the
original cost of original cost of a business’s qualified assets,qualified assets, reduced by that reduced by that cost multiplied by the RP.bcost
multiplied by the RPb.
Third, the difference between the two deductions from Third, the difference between the two deductions from
steps 1 and 2 is multipliedsteps 1 and 2 is multiplied by the RP. The result is by the RP. The result is
subtracted from the deduction under the SSTB subtracted from the deduction under the SSTB limit limit with with
no WQP limitno WQP limit (step 1) to determine(step 1) to determine the deduction the deduction that
may be claimed.
Sourcesan owner may claim. Source: Congressional Congressional Research Service and Joint CommitteeResearch Service and Joint Committee on Taxation, on Taxation, Overview of Deduction for Qualified
Business Income: Section 199A
, March 2019. , March 2019.
Notes:
a. The a. The wage/qualified property limit specifies WQP limit requires that the deduction that the deduction cannotnot exceed the greater of 50% of a exceed the greater of 50% of a
business’sbusiness’s W-2 wages W-2 wages attributable to a taxpayer or 25% of those wages plus 2.5% of the unadjusted basis of attributable to a taxpayer or 25% of those wages plus 2.5% of the unadjusted basis of
depreciable,depreciable, tangible property used in the business tangible property used in the business also attributable to the sameattributable to the same taxpayer. Congressional Research Service 9 The Section 199A Deduction: How It Works and Illustrative Examples taxpayer.
b. The reduction percentage is the ratio of the amount by which a taxpayer’s b. The reduction percentage is the ratio of the amount by which a taxpayer’s taxable income exceeds the
lower AGI exceeds the deduction’s lower income threshold income threshold for the deduction to either $100,000 for joint filersto either $100,000 for joint filers or $50,000 for or $50,000 for al all other filers. The RP helps determine other filers.
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The Section 199A Deduction: How It Works and Illustrative Examples

It helps determine the amount by which the deduction without limitsthe amount by which the deduction without limits should be reduced when a taxpayer’s should be reduced when a taxpayer’s
income fal s in the phase-in range for the SSTB and WQP limits.
AGI falls in the SSTB and WQP phase-in range. Net Operating Losses and the IRC 199A Deduction
Another Another elementaspect of the of the IRC Section 199A deduction that Section 199A deduction that affects effective tax rates for pass-through
business profits is its interaction withcan affect a pass-through business’s effective tax burden is the treatment of net QBI operating losses. When a pass-through business net QBI operating losses. When a pass-through business
owner realizes a net operating loss (NOL) on his or her owner realizes a net operating loss (NOL) on his or her combined QBI from QBI from al all qualified qualified
businesses, the deduction is businesses, the deduction is zero$0 for that tax year. for that tax year.24 This22 The loss may be carried forward to the next loss may be carried forward to the next
year and treated as a negative QBI year and treated as a negative QBI from a trade or business andthat is subtracted from any positive subtracted from any positive net
QBI for the year. (General y, no carryback of the loss is al owed, but a provision in the
Coronavirus Aid, Relief, and Economic Security Act [P.L. 116-136] al ows corporate and
noncorporate businesses to carry back up to five years NOLs incurred in 2018 to 2020.)25 If the
result of carrying the NOL forward to the next tax year is another QBI net operating loss, then the
loss is carried forward until the taxpayer realizes a positive net QBI in a future tax year. When
that happens, a taxpayer’s QBI for that tax year is reduced, but not below zero, by 20% of the
carryover loss.26

24 For any individual, QBI for the year. A QBI NOL may be carried forward until a taxpayer realizes a positive QBI. In the year that happens, a taxpayer’s current-year QBI is reduced, but not below zero, by 20% of the carried over loss.23 Generally, no carryback of the loss is allowed, but the Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136) permitted corporate and noncorporate businesses to carry back up to five years NOLs incurred in 2018 to 2020.24 22 For any individual, estate, or trust, the Section 199A deduction in a tax year is equalestate, or trust, the Section 199A deduction in a tax year is equal to 20% of QBIto 20% of QBI plus 20% of plus 20% of
qualifiedqualified REIT dividends and qualified publicly REIT dividends and qualified publicly traded partnership income. Negative QBI in a tax year results in no traded partnership income. Negative QBI in a tax year results in no
deduction for the businessdeduction for the business portion of that equation. 23 For example, assume that John owns two pass-through businesses, portion of that equation.
25 For more information, see CRS Insight IN11296, Tax Treatment of Net Operating Losses (NOLs) in the Coronavirus
Aid, Relief, and Econom ic Security (CARES) Act
, by Jane G. Gravelle, and CRS Insight IN11240, COVID-19: Potential
Role of Net Operating Loss (NOL) Carrybacks in Addressing the Econom ic Effects
, by Mark P. Keightley.
26 For example, assume that John owns two pass-through businesses, Alpha and Beta. In year one, the QBI from Alpha Alpha and Beta. In year one, the QBI from Alpha
is $20,000, while the QBI from Beta is a lossis $20,000, while the QBI from Beta is a loss of $50,000, yielding a net QBI of -$30,000. In year two, Alpha has a QBI of $50,000, yielding a net QBI of -$30,000. In year two, Alpha has a QBI
of $20,000 and Beta a QBI of $50,000. of $20,000 and Beta a QBI of $50,000. T heThe $30,000 loss from year one is carried over to year two. $30,000 loss from year one is carried over to year two. T oTo calculate his calculate his
Section 199A deduction for year two, John addsSection 199A deduction for year two, John adds 20% of the combined QBI amount for that year ($20% of the combined QBI amount for that year ($ 70,000) to 20% of 70,000) to 20% of
the loss carried over from year one (-$30,000), allowing him to take a deduction of $8,000 for year twothe loss carried over from year one (-$30,000), allowing him to take a deduction of $8,000 for year two : $14,000 -
$6,000 = $8,000.
: $14,000 - $6,000 = $8,000. 24 For more information, see CRS Insight IN11296, Tax Treatment of Net Operating Losses (NOLs) in the Coronavirus Aid, Relief, and Economic Security (CARES) Act, by Jane G. Gravelle, and CRS Insight IN11240, COVID-19: Potential Role of Net Operating Loss (NOL) Carrybacks in Addressing the Economic Effects, by Mark P. Keightley. Congressional Research Service Congressional Research Service
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The Section 199A Deduction: How It Works and Illustrative Examples

Appendix. Final Regulations (TD 9847) on
Classifying Businesses as an SSTB
One significant issue addressed by the final regulations for the One significant issue addressed by the final regulations for the IRC Section 199A deduction was what Section 199A deduction was what
it meant to perform services in the professions of health care, law, accounting, actuarial science, it meant to perform services in the professions of health care, law, accounting, actuarial science,
performing arts, consulting, athletics, financial services, and brokerage services. performing arts, consulting, athletics, financial services, and brokerage services. Section
IRC Section 199A(d)(2) and (199A(d)(2) and (d)(3) deny3) denies the deduction to owners of these professional businesses if their the deduction to owners of these professional businesses if their
taxable income is greater than the taxable income is greater than the deduction’s upper income thresholdupper income threshold of the deduction. Owners of the same . Owners of the same
set of businesses whose taxable income is below the lower income threshold are eligibleset of businesses whose taxable income is below the lower income threshold are eligible for the for the
maximum deduction. The deduction they can claim phases out as their taxable income increases maximum deduction. The deduction they can claim phases out as their taxable income increases
within the phase-in range for both the SSTB and WQPR limitations. Thus, the federal income tax within the phase-in range for both the SSTB and WQPR limitations. Thus, the federal income tax
burden on profits from these SSTBs depends burden on profits from these SSTBs depends critical ycritically on the criteria the IRS on the criteria the IRS wil employemploys to to
classify firms engaged in these activities to varying degrees as SSTBs or non-SSTBs, making classify firms engaged in these activities to varying degrees as SSTBs or non-SSTBs, making
them eligible them eligible for the deduction. for the deduction.
For example, in For example, in the final regulations (TD 9847)TD 9847, the IRS noted that , the IRS noted that skil edskilled nursing, assisted living, and similar facilities nursing, assisted living, and similar facilities
offer a range of services to residents. Consequently, whether those facilities and their owners are offer a range of services to residents. Consequently, whether those facilities and their owners are
eligible eligible for the for the IRC Section 199A deduction depends on the “facts and circumstances” of each case. Section 199A deduction depends on the “facts and circumstances” of each case.
The final regulations did point out two instances where the income-producing activities of a The final regulations did point out two instances where the income-producing activities of a
facility providing medical services did not constitute health care services under facility providing medical services did not constitute health care services under IRC Section 199A—Section 199A—
and thus were eligible for the deduction, subject to the limitations discussed earlier in and thus were eligible for the deduction, subject to the limitations discussed earlier in thethis report. report.
One was an extended care facility for senior citizens that earned its income solely from the living One was an extended care facility for senior citizens that earned its income solely from the living
facilities facilities it offered residents, while contracting with outside entities to provide medical services to it offered residents, while contracting with outside entities to provide medical services to
residents. The other was a surgery center that did not employ health care professionals and residents. The other was a surgery center that did not employ health care professionals and bil ed
billed patients only for facility costs related to surgical procedures. patients only for facility costs related to surgical procedures.
TD 9847 also specified that ownership of an athletic team TD 9847 also specified that ownership of an athletic team fel fell within the scope of services not within the scope of services not
eligibleeligible for the deduction, even though the owners did not directly engage in athletic activities, for the deduction, even though the owners did not directly engage in athletic activities,
because their income ultimately was due to the performance of such activities. because their income ultimately was due to the performance of such activities.
Under the final regulations, brokerage services did not include taking deposits or making loans, Under the final regulations, brokerage services did not include taking deposits or making loans,
but they did include arranging lending transactions between a lender and a borrower. Similarly, but they did include arranging lending transactions between a lender and a borrower. Similarly,
financial services excluded taking deposits and issuing loans, but the regulations did not provide a financial services excluded taking deposits and issuing loans, but the regulations did not provide a
broad exemption for broad exemption for al all services that may be performed by banks. The origination of loans by services that may be performed by banks. The origination of loans by
securities dealers also securities dealers also fel fell outside the range of financial services considered SSTBs. outside the range of financial services considered SSTBs.
Another issue addressed by the final regulations was the definition of a business whose principal Another issue addressed by the final regulations was the definition of a business whose principal
asset was the reputation or asset was the reputation or skil skill of one or more of its employees or owners. In this case, the of one or more of its employees or owners. In this case, the
regulations adopted what can be regarded as a narrow position. According to the regulations, such regulations adopted what can be regarded as a narrow position. According to the regulations, such
a business incorporated one or more of the following elements: (1) a person who received fees, a business incorporated one or more of the following elements: (1) a person who received fees,
compensation, or other income for endorsing products or services; (2) a person who licensed or compensation, or other income for endorsing products or services; (2) a person who licensed or
received fees, compensation, or other income for the use of someone’s likeness, name, signature, received fees, compensation, or other income for the use of someone’s likeness, name, signature,
voice, trademark, or any other symbol associated with that person’s identity; and (3) a person voice, trademark, or any other symbol associated with that person’s identity; and (3) a person
who received fees, compensation, or other income from appearing at an event or on radio, who received fees, compensation, or other income from appearing at an event or on radio,
television, or some other media format. A broader view of this aspect of SSTB income might television, or some other media format. A broader view of this aspect of SSTB income might
substantial ysubstantially reduce the amount of business income eligible for the deduction. reduce the amount of business income eligible for the deduction.
If a business provides goods and services to an SSTB and the same person owns 50% or more of If a business provides goods and services to an SSTB and the same person owns 50% or more of
both businesses, the portion of the business providing those goods and services must be treated as both businesses, the portion of the business providing those goods and services must be treated as
a separate SSTB by the related parties. a separate SSTB by the related parties.
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The Section 199A Deduction: How It Works and Illustrative Examples

TD 9847 included a de minimis rule for determining whether trades or businesses with gross TD 9847 included a de minimis rule for determining whether trades or businesses with gross
receipts of $25.0 receipts of $25.0 mil ionmillion or less should be considered SSTBs. Under the rule, if less than 10% of or less should be considered SSTBs. Under the rule, if less than 10% of
those receipts can be attributed to a SSTB, then the business is not an SSTB. The receipt those receipts can be attributed to a SSTB, then the business is not an SSTB. The receipt
threshold decreases to 5% for businesses with more than $25.0 threshold decreases to 5% for businesses with more than $25.0 mil ionmillion in gross receipts. Owners in gross receipts. Owners
who receive income from SSTBs in excess of the de minimis threshold but conduct a separate who receive income from SSTBs in excess of the de minimis threshold but conduct a separate
trade or business may be able to claim a Section 199A deduction for income from the latter trade trade or business may be able to claim a Section 199A deduction for income from the latter trade
or business. or business.
Remaining uncertainties about which specific businesses can be considered SSTBs make it Remaining uncertainties about which specific businesses can be considered SSTBs make it
difficult to determine the percentage of pass-through firms that difficult to determine the percentage of pass-through firms that wil eligible will eligible for the deductionfor the deduction in
2020, , regardless of their owners’ taxable income. regardless of their owners’ taxable income.


Author Information

Gary Guenther Gary Guenther

Analyst in Public Finance Analyst in Public Finance



Disclaimer
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