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

The Section 199A Deduction: How It Works
February 10, 2023January 23, 2024
and Illustrative Examples
Gary Guenther
Congress made numerous changes to the taxation of individuals and corporate and noncorporate Congress made numerous changes to the taxation of individuals and corporate and noncorporate
Analyst in Public Finance Analyst in Public Finance
businesses as part of P.L. 115-97 (commonly known as the Tax Cuts and Jobs Act or TCJA). businesses as part of P.L. 115-97 (commonly known as the Tax Cuts and Jobs Act or TCJA).

Among those changes was a permanent cut in the corporate income tax rate from a top rate of Among those changes was a permanent cut in the corporate income tax rate from a top rate of
35% in a graduated rate structure to a single rate of 21%. 35% in a graduated rate structure to a single rate of 21%.

During the congressional debate over the TCJA, pass-through business owners sought tax relief comparable to any reduction During the congressional debate over the TCJA, pass-through business owners sought tax relief comparable to any reduction
in corporate tax ratesin corporate tax rates included in the bill. In response. To accommodate the owners, Congress added a new deduction for pass-through business under , Congress added a new deduction for pass-through business under
Internal Revenue Code (IRC) Section 199AInternal Revenue Code (IRC) Section 199A and slightly reduced individual income tax rates. Unlike corporate profits, which are subject to two levels of taxation—at the entity level and at the shareholder/owner level when profits are distributed as dividends or capital gains—pass-through business profits are taxed once, at the owner level. Like most of the individual income tax changes in P.L. 115-97, the IRC Section . Like most of the individual income tax changes in P.L. 115-97, the IRC Section
199A deduction 199A deduction is temporary: it isand cut in individual income tax rates are temporary: they are available from 2018 to 2025. available from 2018 to 2025.
IRC Section 199A allows individuals, trusts, and estates with pass-through business income to deduct up to 20% of IRC Section 199A allows individuals, trusts, and estates with pass-through business income to deduct up to 20% of their
qualified qualified business income (QBI) from business income (QBI) from their taxable ordinary income. (Owners of certain agricultural or horticultural taxable ordinary income. (Owners of certain agricultural or horticultural
cooperatives, real estate investment trusts, and publicly traded partnerships are also eligible for the deduction, but their use of cooperatives, real estate investment trusts, and publicly traded partnerships are also eligible for the deduction, but their use of
it is not covered in this it is not covered in this report.) report.) A pass-through business owner’s QBI is the net amount of QBI is the net amount of the items of income, loss, gain, and items of income, loss, gain, and
deduction for a qualified domestic trade or business. If a taxpayer owns more than one business, then the taxpayer’s deduction for a qualified domestic trade or business. If a taxpayer owns more than one business, then the taxpayer’s total QBI QBI
in a year is the sum of the QBIs for all businesses. 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 20% of taxable income, excluding any net capital gains. net capital gains.

Two limitations Two limitations that reduce the maximum deduction may apply:
 Wage and qualified property limitation (WQP)apply to the deduction that can reduce the allowable deduction to less than 20% of QBI: • the wage and qualified property (WQP) limitation, which reduces the maximum deduction according to , which reduces the maximum deduction according to a
a formula based on an owner’s share of a business’s W-2 wages and the unadjusted basis (or original cost) of formula based on an owner’s share of a business’s W-2 wages and the unadjusted basis (or original cost) of
its qualified assets); and its qualified assets); and
 Specified Service Trade or Business• the specified service trade or business ( (SSTB) limitation, which reduces the maximum deduction an , which reduces the maximum deduction an SSTB
owner may claim for owner may claim for an SSTB’s QBI. An SSTB is QBI. An SSTB is anya trade or business involved in accounting; health care; law; trade or business involved in accounting; health care; law;
actuarial science; athletics; brokerage services; consulting; financial services; the performing arts; investing actuarial science; athletics; brokerage services; consulting; financial services; the performing arts; investing
and investment management; and investment management; orand dealing in securities, partnership interests, or commodities. An SSTB can dealing in securities, partnership interests, or commodities. An SSTB can
also be a business whose principal asset is the reputation or skill of one or more of also be a business whose principal asset is the reputation or skill of one or more of a firm’sits owners or owners or
employees. employees.
The SSTB and WQP limitations phase in when The SSTB and WQP limitations phase in when thean owner’s owner’s taxable income exceeds a lower income thresholdincome exceeds a lower income threshold ($364,200, which is set at $383,900 for joint for joint
filers and $filers and $182,100191,950 for other filers in for other filers in 2023). Their2024. The limitations’ full impact is realized when taxable income exceeds an upper income full impact is realized when taxable income exceeds an upper income
threshold ($threshold ($464,200483,900 for joint filers and $ for joint filers and $232,100241,950 for other filers in for other filers in 20232024). ).
This report provides a brief overview of the deduction and This report provides a brief overview of the deduction and severalfive hypothetical examples of how it is calculated examples of how it is calculated in the presence of the
when the WQP and SSTB limitationsWQP and SSTB limitations apply. .

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Contents
Overview 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 ...........Hypothetical Examples............................................................................................................ 5
Scenario 1: Taxable Income Is Below the Deduction’s Lower Income Threshold ....................... 5
Scenario 2: Taxable Income Is Above the Upper Income Threshold for SSTB QBI only ............ 6
Scenario 3: Taxable Income only ........................................................................................................................................ 6 Scenario 3: Taxable Income Is Above the Upper Income Limitation for Non-SSTB QBI
only ... QBI only ..................................................................................................................................... 6
Scenario 4: Taxable Income Is Within the Phase-in Range for the SSTB and WQP
Limits for Non-SSTB QBI only ............................................................................................. 6
Scenario 5: Taxable Income Is Within the Phase-in Range for the SSTB and WQP
Limitations for SSTB Qualified Income Only QBI Only ............................................................................................ 7
Net Operating Losses and the IRC 199A Deduction ....................................................................... 9 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 2024 ..................................................................................... 8

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

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

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

ongress made numerous changes to the taxation of individuals and corporate and ongress made numerous changes to the taxation of individuals and corporate and
noncorporate businesses in December 2017, as part of P.L. 115-97 (commonly known as noncorporate businesses in December 2017, as part of P.L. 115-97 (commonly known as
C the Tax Cuts and Jobs Act or TCJA).1 A key change was a permanent cut in the corporate C the Tax Cuts and Jobs Act or TCJA).1 A key change was a permanent cut in the corporate
income tax rate from a top rate of 35% within a graduated income tax rate from a top rate of 35% within a graduated corporate tax rate structure to a single tax rate structure to a single
rate of 21%. rate of 21%.
During the congressional debate over the tax bill, pass-through business owners sought tax relief During the congressional debate over the tax bill, pass-through business owners sought tax relief
comparable to any reduction in corporate tax ratescomparable to any reduction in corporate tax rates included in the legislation.2 In response, .2 In response,
Congress added a new deduction for pass-through businesses under Internal Revenue Code (IRC) Congress added a new deduction for pass-through businesses under Internal Revenue Code (IRC)
Section 199ASection 199A and made slight cuts in individual income tax rates. Unlike corporate profits, pass-through business profits are taxed only once, at the owner level. The deduction allows pass-through business owners to deduct up to 20% of . The deduction allows pass-through business owners to deduct up to 20% of their
qualified business income (QBI) in determining their individual income tax liability. Like most of qualified business income (QBI) in determining their individual income tax liability. Like most of
the changes in the individual income tax in P.L. 115-97, the Section 199A deduction the changes in the individual income tax in P.L. 115-97, the Section 199A deduction is temporary:
it isand individual income tax rate cuts are temporary: they are available from 2018 to 2025. available from 2018 to 2025.
This report provides a brief overview of the deduction and This report provides a brief overview of the deduction and several examples of how it is examples of how it is calculated in
five basic scenarios.
calculated. Overview of the Section 199A Deduction
Between 2018 and 2025, IRC Section 199A allows individuals, trusts, and estates with income Between 2018 and 2025, IRC Section 199A allows individuals, trusts, and estates with income
from pass-through businesses to deduct up to 20% of from pass-through businesses to deduct up to 20% of their QBI in determining their federal tax QBI in determining their federal tax
liability. (Owners of certain agricultural or horticultural cooperatives, real estate investment trusts liability. (Owners of certain agricultural or horticultural cooperatives, real estate investment trusts
[REITs], and publicly traded partnerships [PTPs] are also eligible for the deduction, but their use [REITs], and publicly traded partnerships [PTPs] are also eligible for the deduction, but their use
of it is not covered in this report.) The deduction of it is not covered in this report.) The deduction may beis claimed on the Form 1040, after eligible claimed on the Form 1040, after eligible
taxpayers take taxpayers take either the standard deduction or the sum of their itemized deductions.3 the standard deduction or the sum of their itemized deductions.3
Several considerations are key in Several considerations are key in claimingbenefiting from the deduction: the deduction:
• a pass-through business owner’s adjusted gross income (AGI), a pass-through business owner’s adjusted gross income (AGI),
• the nature of a pass-through business, and the nature of a pass-through business, and
• an owner’s share of a business’s W-2 wages and the an owner’s share of a business’s W-2 wages and the aggregate original cost of its original cost of its qualified
assets qualified assets acquired and placed in service in the past 10 years. .
Who Qualifies for the Deduction?
The IRC Section 199A deduction applies to The IRC Section 199A deduction applies to a broad range ofmost business activities. The deduction’s business activities. The deduction’s
final regulations (Treasury Decision [TD] 9847) specify that a trade or business under IRC final regulations (Treasury Decision [TD] 9847) specify that a trade or business under IRC
Section 199A has the same meaning as a trade or business under Section 162.4 An activity Section 199A has the same meaning as a trade or business under Section 162.4 An activity
qualifies as an IRC Section 162 business if it is conducted with qualifies as an IRC Section 162 business if it is conducted with “continuity, regularity, and the 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 earning a 1 For more details on those changes, see CRS Report R45092, 1 For more details on those changes, see CRS 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 Tax Debate” 2 For example, see Brian Faler, “What You Need to Know about the Senate’s Pass-through Tax Debate” Politico, ,
November 28, 2017, at https://www.politico.com/story/2017/11/28/what-is-pass-through-tax-debate-senate-192470. November 28, 2017, at https://www.politico.com/story/2017/11/28/what-is-pass-through-tax-debate-senate-192470.
3 See CRS Infographic IG10014, 3 See CRS Infographic IG10014, The U.S. Individual Income Tax System, 2019, by Molly F. Sherlock. , by Molly F. Sherlock.
4 U.S. Department of the Treasury, Internal Revenue Service, “Qualified Business Income Deduction,” Final 4 U.S. Department of the Treasury, Internal Revenue Service, “Qualified Business Income Deduction,” Final
Regulations, TD 9847, Regulations, TD 9847, 84 Federal Register, February 8, 2019, pp. 2952-3013. The final regulations for the deduction, , February 8, 2019, pp. 2952-3013. The final regulations for the deduction,
issued by the IRS on January 18, 2019, in TD 9847, addressed these questions and several others. TD 9847 represented issued by the IRS on January 18, 2019, in TD 9847, addressed these questions and several others. TD 9847 represented
the culmination of a process that commenced on August 16, 2018, when the IRS released proposed regulations for the culmination of a process that commenced on August 16, 2018, when the IRS released proposed regulations for
Section 199A (REG-107892-18) and included a public hearing on October 16, 2018. The IRS received 335 comments Section 199A (REG-107892-18) and included a public hearing on October 16, 2018. The IRS received 335 comments
in response to its proposed rulemaking. in response to its proposed rulemaking.
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profit.” Such an activity can be performed on a full-time or part-time basis. In the case of the IRC Section 199A deduction, there are two basic kinds of trades and businesses: a case of the IRC Section 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-specified service trade or business (SSTB) and a non-specified service trade or business (non-
SSTB). SSTB).
What Is a Specified Service Trade or Business?
IRC Section 199A(d)(2) specifies that an SSTB is any trade or business that IRC Section 199A(d)(2) specifies that an SSTB is any trade or business that
• provides services in accounting, health, law, actuarial science, athletics, provides services in accounting, health, law, actuarial science, athletics,
brokerage services, consulting, financial services, or the performing arts; or brokerage services, consulting, financial services, or the performing arts; or
• provides services in investing and investment management, trading, or dealing in provides services in investing and investment management, trading, or dealing in
securities, partnership interests, or commodities; or securities, partnership interests, or commodities; or
• derives much of its income from the reputation or skill of one or more of a derives much of its income from the reputation or skill of one or more of a
firm’s firm’s owners or employees. owners or employees.
There is considerable overlap between SSTBs and businesses that do not qualify for There is considerable overlap between SSTBs and businesses that do not qualify for a tax
exclusion forthe IRC Section 1202 exclusion from the long-term capital gains long-term capital gains tax on the sale or exchange of qualified small business stockon 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 . According to IRC Section 1202(e)(3)(A), qualified stock issued by these
the following businesses is ineligible for the gains exclusion: businesses is ineligible for the gains exclusion:
any trade or business any trade or business involving the performance ofinvolving the performance of services in the fields of health, law, services in the fields of health, law,
engineering, architecture, accounting, actuarial science, performing arts, consulting, engineering, architecture, accounting, actuarial science, 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 oneOne difference between SSTBs and difference between SSTBs and businesses not eligiblethe businesses ineligible for the IRC Section for the IRC Section
1202 gains exclusion. For 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 eligible
for the deduction, regardless of an owner’s taxable income. Under IRC Section 1202, by contrast,
those two professional services are ineligible for the gains exclusion. 1202 gains exclusion is that the latter includes engineering services and architecture and the former does not. Since SSTBs generally are Since SSTBs generally are
professional service firms whose success professional service firms whose success may stem fromoften depends on the skills and reputation of their owners the skills and reputation of their owners
and employees, it is and employees, it is difficult to understandunclear why engineering why engineering services and architecture and architecture firms are not are not
classified as SSTBs. classified as SSTBs.
The deduction’s final regulations addressed several The deduction’s final regulations addressed several complicated issues regarding the issues regarding the
classification of a business as an SSTB. Those issues are discussed in classification of a business as an SSTB. Those issues are discussed in thethe Appendix.
What Income Qualifies for the Deduction?
The deduction a pass-through business owner may claim depends partly on the owner’s QBIThe deduction a pass-through business owner may claim depends partly on the owner’s QBI. IRC
Section 199A defines QBI as, which is the net amount of items of income, deduction, loss, and gain for a the net amount of items of income, deduction, loss, and gain for a
pass-through business. Only income items connected with a trade or business conducted in the pass-through business. Only income items connected with a 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 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 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 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, combine (or “aggregate”) those businesses, even if they are conducted as separate legal entities,
in determining the owner’s QBI.6 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 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. 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 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 each trade or business to be combined. Second, the ownership structure 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 SSTBs. Trades or businesses to be aggregated must satisfy at least two of the following three conditions: (1) they provide goods and services that are the same or (continued...) Congressional Research Service Congressional Research Service
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QBI does not include (1) wage income; (2) reasonable compensation received by an S corporation QBI does not include (1) wage income; (2) reasonable compensation received by an S corporation
shareholder for services provided to the business; (3) guaranteed payments to a partner for shareholder for services provided to the business; (3) guaranteed payments to a partner for
services provided to a partnership; and (4) investment income unrelated to a trade or business. services provided to a partnership; and (4) investment income unrelated to a trade or business.
Do Any Limits Apply to the Deduction?
Technically, there are three limitations on the deduction. One applies to Technically, there are three limitations on the deduction. One applies to every claim for the claim for the
deduction, while the other two apply only if a pass-through business owner’s AGI exceeds a deduction, while the other two apply only if a pass-through business owner’s AGI exceeds a
specified amount.7 specified amount.7
The unavoidable limitation is an The unavoidable limitation is an overall cap on the deduction a business owner may take in a tax a business owner may take in a tax
year, a cap that can be thought of as the year, a cap that can be thought of as the maximum deduction. It is the lesser of . It is the lesser of
• the sum of 20% of an owner’s QBI and (if applicable) 20% of any REIT the sum of 20% of an owner’s QBI and (if applicable) 20% of any REIT
dividends and PTP income the owner receives, or dividends and PTP income the owner receives, 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:
• 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, which reduces and eventually nullifies the maximum the maximum deduction an owner may deduction an owner may
claim for claim for SSTBan SSTB’s QBI. QBI.
The SSTB and WQP limitations do not apply to the 20% deduction for REIT and PTP income. 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 They phase in if a pass-through business owner’s income exceeds the deduction’s lower income
threshold ($threshold ($364,200383,900 for joint filers and $ for joint filers and $182,100191,950 for other filers in for other filers in 20232024). Their full impact is ). Their full impact is
realized when an owner’s AGI exceeds an upper income threshold ($realized when an owner’s AGI exceeds an upper income threshold ($464,200483,900 for joint filers and for joint filers and
$$232,100241,950 for other filers in for other filers in 20232024)). Table 1 shows the lower income and upper income thresholds shows the lower income and upper income thresholds
for both limitations from 2018 to for both limitations from 2018 to 20232024; the amounts have been indexed for inflation since 2019. ; 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
must satisfy at least two of the following three conditions: (1) they provide goods and services that are the same or
usually sold together; (2) they share facilities or key business elements, such as personnel, accounting, legal, usually sold together; (2) they share facilities or key business elements, such as personnel, accounting, legal,
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 businesses in the combined group. one or more of the other businesses in the combined group.
7 This discussion of the limitations for the Section 199A deduction is based on a detailed explanation of how the 7 This discussion of the limitations for the Section 199A deduction is based on a detailed explanation of how the
deduction works given in a report by the Joint Committee on Taxation. See Joint Committee on Taxation, deduction works given in a report by the Joint Committee on Taxation. See Joint Committee on Taxation, Overview of
Deduction for Qualified Business Income: 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 are a firm’s total wages subject to withholding, elective deferrals, and deferred compensation. 8 W-2 wages are a firm’s total wages subject to withholding, elective deferrals, and deferred compensation.
The unadjusted basis of qualified property refers to the cost of tangible, depreciable assets when a pass-through firm The unadjusted basis of qualified property refers to the cost of tangible, depreciable assets when a pass-through firm
acquires them. The property must be depreciable under Section 167 of the federal tax code, used in a qualified business acquires them. The property must be depreciable under Section 167 of the federal tax code, used in a qualified business
at the close of the tax year for which the Section 199A deduction is claimed, and have a “depreciable period” that does at the close of the tax year for which the Section 199A deduction is claimed, and have a “depreciable period” that does
not end before the close of that year. Under Section 199A, that period ends either 10 years after a depreciable asset is not end before the close of that year. Under Section 199A, that period ends either 10 years after a depreciable 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. 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. Special considerations apply to S corporations and partnerships in determining an owner’s allocable share.
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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

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
2021 2021
$329,800 $329,800
$164,900 $164,900
$429,800 $429,800
$214,900 $214,900
2022 2022
$340,100 $340,100
$170,050 $170,050
$440,100 $440,100
$220,050 $220,050
2023 2023
$364,200 $364,200
$182,100 $182,100
$464,200 $464,200
$232,100 $232,100
2024 $383,900 $191,950 $483,900 $241,950 Source: P.L. 115-97 and IRS Revenue Procedures 2018-57, 2019-44, 2020-45, 2021-45, P.L. 115-97 and IRS Revenue Procedures 2018-57, 2019-44, 2020-45, 2021-45, and 2022-382022-38, and 2023-34. .
Notes: All other filers are single and head-of-household filers andAll other filers are single and head-of-household filers and married persons filing as a single person. The married persons filing as a single person. The
amounts amounts for 2019 and 2023 since 2019 have been indexed for inflation. have been indexed for inflation.
WQP Limitation
This limitation is This limitation is tied tobased on a pass-through business owner’s share of a business’s W-2 wages and the 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 if the WQP limit original cost of its tangible, depreciable assets. Three outcomes are possible if the WQP limit
applies to the deduction and QBI is from non-SSTB businesses only. applies to the deduction and QBI is from non-SSTB businesses only.
(1) An owner’s AGI is less than the lower income threshold: in this case, the maximum : in this case, the maximum
deduction may be claimed. deduction may be claimed.
(2) An owner’s AGI falls in the phase-in range for the WQP limit: in this case,in this case, the maximum the maximum
deduction and the deduction with the full WQP limit are calculated and compared. The difference deduction and the deduction with the full WQP limit are calculated and compared. The difference
between the two deductions is multiplied by a between the two deductions is multiplied by a reduction percentage to determine a reduction to determine a reduction
amount, which is subtracted from the maximum deduction to determine the deduction amount, which is subtracted from the maximum deduction to determine the deduction amount an an
owner may claim.9 owner may claim.9
(3) An owner’s taxable income exceeds the upper income threshold: in this case, the in this case, the
deduction deduction is subject to the full WQP limit. As a result, the deduction cannot exceed the greater of 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 businessowner’s share of the unadjusted basis of qualified property used in the business going back up to 10 years. .
SSTB Limitation
This limitation applies if an owner’s AGI is greater than the lower income threshold. There are This limitation applies if an owner’s AGI is greater than the lower income threshold. There are
four four basicpossible outcomes: outcomes:
(1) An owner’s AGI is less than the lower income threshold: : in this case, the maximum deduction may be the maximum deduction may be
claimed.

claimed. 9 The deduction’s reduction percentage (RP) reflects the degree to which an owner’s AGI exceeds the lower income 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%: 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 $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/ 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. $100,000 for joint filers or $50,000 for other filers) x 100.
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(2) An owner’s AGI falls in the phase-in range but only the SSTB limit applies: the maximum : the maximum
deduction is reduced by deduction is reduced by a phased-inthe SSTB limit. SSTB limit.
The phase-in range for both the SSTB and WQP limits The phase-in range for both the SSTB and WQP limits in 2023 is $364,200 to $464,200 for joint
filers (a range of $100,000), and $182,100 to $232,100 for other filers (a range of $50,000)for joint filers is always double the range for other filers. In 2024, the range is $383,900 to $483,900 for joint filers and $191,950 to $241,950 for other filers. When . When
a pass-through business owner’s AGI falls within a pass-through business owner’s AGI falls within either the phase-in range, the maximum deduction is reduced range, the maximum deduction is reduced
according to a formula based on the extent to which the owner’s AGI exceeds the lower income according to a formula based on the extent to which the owner’s AGI exceeds the lower income
threshold. This excess is divided by $100,000 for joint filers and $50,000 for all other filers, to threshold. This excess is divided by $100,000 for joint filers and $50,000 for all other filers, to
determine the deduction’s RP. determine the deduction’s RP. So ifIf only the SSTB limitation applies, an owner’s QBI from an only the SSTB limitation applies, an owner’s QBI from an
SSTB is SSTB is first reduced by an amount equal to (QBI x RP)reduced by an amount equal to (QBI x RP), and then; the deduction equals 20% of the deduction equals 20% of
the reduced QBI. the reduced QBI.
(3) An owner’s AGI lies in the phase-in range and the SSTB and WQP limits both apply: in this case, the the
maximum deduction is reduced first by a phased-in SSTB limit, and then by a phased-in WQP maximum deduction is reduced first by a phased-in SSTB limit, and then by a phased-in WQP
limit. limit.
The first step The first step in calculating the deduction is to reduce the owner’s QBI from an SSTB and is to reduce the owner’s QBI from an SSTB and his/herthe amount of the owner’s share of a business’s W-2 share of a business’s W-2
wages and the unadjusted basis of its qualified property, by the RP. For example, if an owner’s wages and the unadjusted basis of its qualified property, by the RP. For example, if an owner’s
AGI above the lower income threshold is 90% of the phaseout range for a joint filer (i.e., AGI above the lower income threshold is 90% of the phaseout range for a joint filer (i.e.,
$454,200$435,510 for married joint filers in for married joint filers in 20232024), then the owner’s SSTB QBI and the owner’s share of a ), then the owner’s SSTB QBI and the owner’s share of a
firm’s W-2 wages and the unadjusted basis of its qualified property are each reduced by 90%. firm’s W-2 wages and the unadjusted basis of its qualified property are each reduced by 90%.
These adjustments produce two possible deductions: These adjustments produce two possible deductions:
• one equal to 20% of the reduced SSTB QBI without the modified WQP limit, and one equal to 20% of the reduced SSTB QBI without the modified WQP limit, and
• one equal to 20% of the reduced SSTB QBI with the modified WQP limit. one equal to 20% of the reduced SSTB QBI with the modified WQP limit.
In the second step, theThe difference between those two deductions is multiplied by the RP difference between those two deductions is multiplied by the RP. This
yields, yielding a reduction amount, which is subtracted from the deduction without the WQP limit a reduction amount, which is subtracted from the deduction without the WQP limit
(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 AGI exceeds the upper income threshold: no deduction may be claimed, as the no deduction may be claimed, as the
owner’s QBI comes entirely from an SSTB. owner’s QBI comes entirely from an SSTB.
Five Basic ScenariosHypothetical Examples
One way to understand howOne way to understand how a complicated tax provision like the IRC Section 199A deduction is intended to work is to calculate it the IRC Section 199A deduction is intended to work is to calculate it
under different scenarios. The following five scenarios under different scenarios. The following five scenarios explore illustrate the effects of the SSTB and WQP the effects of the SSTB and WQP
limits on limits on athe same single filer with different single filer with different amounts of AGI. The resultsAGI amounts in 2024; the effects are summarized i are summarized in Table 2. The The
scenarios can be regarded as basic in that they scenarios can be regarded as basic in that they illustrateshow how the deduction is calculated if a pass- how the deduction is calculated if a pass-
through business owner’s AGI (1) does not exceed the lower income threshold; (2) falls in the through business owner’s AGI (1) does not exceed the lower income threshold; (2) falls in the
phase-in range for the two limits; or (3) exceeds the upper income threshold. phase-in range for the two limits; or (3) exceeds the upper income threshold.
Scenario 1: Taxable Income Is Below the Deduction’s Lower Income
Threshold
Assume that in Assume that in 20232024
• James owns a restaurant (non-SSTB) as a sole proprietor; 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 he is a single filer with an AGI of $180,000 and no net capital gains; and
• his business’s QBI totals $140,000. his business’s QBI totals $140,000.
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In this scenario, James’s taxable income ($180,000) is In this scenario, James’s taxable income ($180,000) is slightly below the lower income threshold below the lower income threshold
for for single filers ($191,900) in 2024, allowing him to claim the maximum deduction, whichsingle filers ($182,100 in 2023), which means that he may claim the maximum deduction. So
his 2023 deduction is the lesser of 20% of is the lesser of 20% of James’shis QBI, or 20% of his ordinary income, or QBI, or 20% of his ordinary income, or
$28,000.10 .10
Scenario 2: Taxable Income Is Above the Upper Income Threshold for
SSTB QBI only
Assume that in Assume that in 2023
2024 • James is James is part ownera partner of a law firm (SSTB); of a law firm (SSTB);
• he is a single filer with an AGI of $245,000 and no net capital gains; and he is a single filer with an AGI of $245,000 and no net capital gains; and
 his • his share of the SSTB’s QBI is $SSTB’s QBI is $190180,000. ,000.
Because this scenario involves a pass-through business owner Because this scenario involves a pass-through business owner whose AGI exceedswith an AGI above the the
deduction’s upper income threshold ($deduction’s upper income threshold ($232,100241,950) for a single filer in ) for a single filer in 2023, and whose entire QBI
comes2024 and a QBI the at comes entirely from an SSTB, James may claim from an SSTB, James may claim no deduction for that for that tax year. year.
Scenario 3: Taxable Income Is Above the Upper Income Limitation for
Non-SSTB QBI only
Assume that in Assume that in 2023
2024 • James owns a restaurant (non-SSTB) as a sole proprietor; James owns a restaurant (non-SSTB) as a sole proprietor;
• he is a single filer with an AGI of $ he is a single filer with an AGI of $250245,000 and no net capital gains; ,000 and no net capital gains;
• his QBI his QBI comes tototals $180,000; and $180,000; and
• his share of the restaurant’s W-2 wages is $60,000, and his share of the his share of the restaurant’s W-2 wages is $60,000, and his share of the
unadjusted basis of its qualified property unadjusted basis of its qualified property placed in service in the previous 10 years is $100,000. is $100,000.
In this scenario, the QBI is entirely from a non-SSTB, and James’s AGI is above the upper In this scenario, the QBI is entirely from a non-SSTB, and James’s AGI is above the upper
income threshold ($income threshold ($232,100241,9500) for a single filer in ) for a single filer in 20232024. As a result, the deduction is subject to the . As a result, the deduction is subject to the
WQP limit, but not the SSTB limit. The deduction James may claim cannot exceed the larger of WQP limit, but not the SSTB limit. The deduction James may claim cannot exceed the larger of
50% of his share of the restaurant’s W-2 wages, or 25% of those wages plus 2.5% of his share of 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 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 $17,500, respectively.11 Thus, James may claim a $30,000 Section 199A deduction for Section 199A deduction for 20232024.12 .12
Scenario 4: Taxable Income Is Within the Phase-in Range for the
SSTB and WQP Limits for Non-SSTB QBI only
Assume that in Assume that in 20232024
• James owns a restaurant (non-SSTB) as a sole proprietor; 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 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
$180,000 = $36,000). $180,000 = $36,000).
11 In this example, 50% of W-2 wages equal $30,000 (i.e., 0.5 x $60,000) and 25% of those wages plus 2.5% of the 11 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)). 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 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. the WQP limitation, he can claim only $30,000.
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• he files as a single taxpayer with an AGI of $200,000 and no net capital gains; he files as a single taxpayer with an AGI of $200,000 and no net capital gains;
• his QBI totals $180,000; and his QBI totals $180,000; and
• his share of the restaurant’s W-2 wages and the unadjusted basis of its qualified his share of the restaurant’s W-2 wages and the unadjusted basis of its qualified
property is $60,000 and $100,000, respectively. property is $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 the phase-in range for the SSTB and WQP limits, although only the WQP limit appliesWQP limit. The . The
deduction he may claim deduction he may claim is the maximum deduction reduced by the difference between that
deduction andfor 2024 is equal to his maximum deduction less the deduction the deduction withunder the full WQP limit, multiplied by James’s RP. the full WQP limit, multiplied by James’s RP.
The first step is to calculate the RP, which is equal to James’s taxable income less the lower The first step is to calculate the RP, which is equal to James’s taxable income less the lower
income threshold, divided by $50,000 (the difference between the lower income threshold, divided by $50,000 (the difference between the lower income threshold and the
and upper income upper income thresholdthresholds for a single filer). In this case, the RP is for a single filer). In this case, the RP is 35.816%.13 His reduction amount is %.13 His reduction amount is
calculated by multiplying the RP bythe product of the RP and the difference between the deduction with no WQP limit and the difference between the deduction with no WQP limit and
the deduction with the full WQP limit. The deduction with no limit is $the deduction with the full WQP limit. The deduction with no limit is $4036,000,14 ,000,14 whereasand the the
deduction deduction withunder the full the full WQP limit is $30,000.15 As a result, the reduction amount is $limit is $30,000.15 As a result, the reduction amount is $3,580960,16 and ,16 and
the IRC Section 199A deduction that James may claim in the IRC Section 199A deduction that James may claim in 20232024 is is $36,42035,040.17 .17
Scenario 5: Taxable Income Is Within the Phase-in Range for the
SSTB and WQP Limitations for SSTB Qualified IncomeQBI Only
Assume that in Assume that in 20232024
• James is a partner in a law firm (SSTB); James is a partner in a law firm (SSTB);
• he is a single filer with an AGI of $200,000 and no net capital gains; he is a single filer with an AGI of $200,000 and no net capital gains;
• his share of the firm’s QBI is $180,000; and his share of the firm’s QBI 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 is $60,000 and $100,000, respectively. property is $60,000 and $100,000, respectively.
This scenario is the most complicated of the five because it requires calculating the deduction This scenario is the most complicated of the five because it requires calculating the deduction
under both the SSTB and the WQP under both the SSTB and the WQP limits. This is because James’s taxable income is limitations, multiplying any difference by James’s RP, and reducing the maximum deduction by that amount. As a single filer, James’s taxable income falls within the within the
phase-in range for phase-in range for boththe two limitations, and his entire QBI comes from an SSTB. and his entire QBI comes from an SSTB.
The calculation involves several steps. The first step is to determine his deduction under the The calculation involves several steps. The first step is to determine his deduction under the
SSTB limit only. To do so, James’s QBI is reduced by an amount equal to his RP multiplied by SSTB limit only. To do so, James’s QBI is reduced by an amount equal to his RP multiplied by
his QBIhis QBI share. The reduced QBI is then multiplied by 20% to calculate the deduction he could . The reduced QBI is then multiplied by 20% to calculate the deduction he could
claim under the SSTB limit claim under the SSTB limit without the WQP limit; inonly. In this case, the deduction is $ this case, the deduction is $23,11230,204.18 .18
The next step is to determine his deduction with the WQP limit only, which is The next step is to determine his deduction with the WQP limit only, which is multiplying his RP by the greater of 50% the greater of 50%
of James’s share of W-2 wages of James’s share of W-2 wages multiplied by his RP ($19,260($30,000),19 or the sum of 25% of those ),19 or the sum of 25% of those

13 $200,000 - $13 $200,000 - $182,100 = $17,900, $17,900191,950 = $8,050, $8,050/$50,000 = 0./$50,000 = 0.358161, and 0., and 0.358161 x 100 = x 100 = 35.816.1%. %.
14 0.20 x $200,000. 14 0.20 x $200,000.
15 See footno15 See footnote 11.
16 $16 $4036,000 - $30,000 = $,000 - $30,000 = $106,000, and $,000, and $106,000 x 0.,000 x 0.358 = $3,580161 = $960. .
17 $17 $4036,000 - $,000 - $3,580 = $36,420960 = $3,040. .
18 This is the result of multiplying his RP (18 This is the result of multiplying his RP ($17,500/$50,000 = 35.816%) by his QBI ($180,000), subtracting that amount %) by his QBI ($180,000), subtracting that amount
($62,440($28,980) from his ) from his QBI ($180,000)QBI, and then multiplying that amount and then multiplying that amount ($151,020) by 20% (0.2 x $by 20% (0.2 x $115,560 = $23,112151,020 = $30,204). ).
19 [(0.5 x ($60,000 - ($60,000 x 0.358))] = (0.5 x $38,520) = $19,260. 19 [(0.5 x ($60,000 - ($60,000 x 0.358))] = (0.5 x $38,520) = $19,260.
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wages and 2.5% of share of the law firm’s total unadjusted basis of qualified property wages and 2.5% of share of the law firm’s total unadjusted basis of qualified property, multiplied
by the RP ($25,680 ($17,500).20 Thus, James’s deduction under the WQP limit ).20 Thus, James’s deduction under the WQP limit only is $4,800is $25,680. .
In the final step, the difference between the deduction under the SSTB limit In the final step, the difference between the deduction under the SSTB limit without the WQP
limit ($23,112only ($30,204) and the deduction under the ) and the deduction under the SSTB limit with the modified WQP limit ($25,680WQP limit only ($4,8000) is ) is
multiplied by James’s RPmultiplied by James’s RP (16%). The result is subtracted from the deduction with no WQP limit . The result is subtracted from the deduction with no WQP limit
($23,112($30,204) to determine the Section 199A deduction James may claim for the ) to determine the Section 199A deduction James may claim for the 20232024 tax year: tax year:
$20,54426,139.21 .21
This This deductionamount is about is about 4425% less than the deduction James could claim in the fourth scenario, % less than the deduction James could claim in the fourth scenario,
whicheven though the scenario is identical to the fifth scenario regarding James’s taxable income, QBI, and share of W-2 is identical to the fifth scenario regarding James’s taxable income, QBI, and share of W-2
wages and unadjusted basis of qualified property. The difference wages and unadjusted basis of qualified property. The difference illustratesreflects the impact of both the impact of both
limits on the allowable deduction when part or all of a pass-through business owner’s QBI comes 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 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 first three scenarios are not comparable because they are based on differing owner AGIs and AGIs and
QBIs. QBIs.
Table 2. Summary of Five Scenarios
for 2024 SSTB
WQPa

Limit
Limit
Deduction
Deduction Amount ($)
Scenario 1: :
No No
No No
The deduction is the lesser of The deduction is the lesser of
$28,000 $28,000
Single filer has Single filer has
•
20% of QBI, or 20% of QBI, or
adjusted gross adjusted gross
income (AGI) income (AGI)
•
20% of ordinary taxable 20% of ordinary taxable
below the below the 20232024
income less net capital income less net capital
lower income lower income
gains. gains.
threshold (see threshold (see
(This amount can also be (This amount can also be
Table 1). .
referred to as the maximum referred to as the maximum
Qualified Qualified
deduction.) deduction.)
business income business income
(QBI) comes (QBI) comes
from an SSTB, a from an SSTB, a
non-SSTB, or non-SSTB, or
both. both.
Scenario 2: :
Yes Yes
No No
No deduction is allowed No deduction is allowed
$0 $0
Single filer has Single filer has
because QBI is from an SSTB because QBI is from an SSTB
AGI above the AGI above the
only and AGI exceeds the only and AGI exceeds the
20232024 upper upper
upper income threshold. upper income threshold.
income income
threshold (see threshold (see
Table 1). QBI . QBI
comes from an comes from an
SSTB only. 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 Scenario 3: No Yes The deduction is the least of $30,000 Single filer has • 20% of QBI, AGI above the 2024 upper • 20% of ordinary income, income or threshold (see • the deduction with the ful Table 1). WQP limit. QBI comes from a non-SSTB only. 20 0.16 x 30,000 = $4,800. 21 [($30,204 - $4,800) x 0..16)] = $4,065, and $30,204 - $4,065 = $26,139. .
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SSTB
WQPa

Limit
Limit
Deduction
Deduction Amount ($)
Scenario 3:
No
Yes
The 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

the deduction with the ful
Table 1).
WQP limit.
QBI comes from
a non-SSTB only.
Scenario 4:
No
Yes
The maximum deduction is
$36,4204: No Yes The maximum deduction is $35,040
Single filer’s AGI Single filer’s AGI
reduced by an amount equal to reduced by an amount equal to
is within the is within the
the reduction percentage (RP)b the reduction percentage (RP)b
phase-in range phase-in range
multiplied by the difference multiplied by the difference
for the SSTB and for the SSTB and
between the deduction without between the deduction without
WQP limitations WQP limitations
the WQP limit and the the WQP limit and the
(see (see Table 1).
deduction with the ful limit. deduction with the ful limit.
QBI is from a QBI is from a
non-SSTB only. non-SSTB only.
Scenario 5: :
Yes Yes
Yes Yes
An owner’s deduction is An owner’s deduction is
$ $20,54426,139
Single filer’s Single filer’s
calculated in three steps. calculated in three steps.
taxable income taxable income
First, the SSTB limit is applied. First, the SSTB limit is applied.
is within the is within the
The deduction equals 20% of a The deduction equals 20% of a
phase-in range phase-in range
reduced QBI, which equals QBI reduced QBI, which equals QBI
for the SSTB and for the SSTB and
less QBI multiplied by the RP.b less QBI multiplied by the RP.b
WQP limitations WQP limitations
(s(see Table 1). .
Second, the WQP limit is Second, the WQP limit is
applied. The deduction cannot applied. The deduction cannot
QBI is from an QBI is from an
exceed the greater of 50% of an exceed the greater of 50% of an
SSTB only. SSTB only.
owner’s share of a business’s owner’s share of a business’s
adjusted wages or 25% of such adjusted wages or 25% of such
wages plus 2.5% of the owner’s wages plus 2.5% of the owner’s
share of its adjusted qualified share of its adjusted qualified
property. Adjusted wages are a property. Adjusted wages are a
business’s W-2 wages less business’s W-2 wages less
those wages multiplied by the those wages multiplied by the
RP. Adjusted property is the RP. Adjusted property is the
original cost of a business’s original cost of a business’s
qualified assets, reduced by that qualified assets, reduced by that
cost multiplied by the RP.b cost multiplied by the RP.b
Third, the difference between Third, the difference between
the two deductions from steps the two deductions from steps
1 and 2 is multiplied by the RP. 1 and 2 is multiplied by the RP.
The result is subtracted from The result is subtracted from
the deduction under the SSTB the deduction under the SSTB
limit with no WQP limit (step limit with no WQP limit (step
1) to determine the deduction 1) to determine the deduction
an owner may claim. an owner may claim.
Source: Congressional Research Service and Joint Committee on Taxation, Congressional Research Service and Joint Committee on Taxation, Overview of Deduction for Qualified
Business Income: Section 199A, March 2019. , March 2019.
Notes:
a. The WQP limit requires that the deduction not exceed the greater of 50% of a business’s W-2 wages a. The WQP limit requires that the deduction not exceed the greater of 50% of a business’s W-2 wages
attributable to a taxpayer or 25% of those wages plus 2.5% of the unadjusted basis of depreciable, tangible attributable to a taxpayer or 25% of those wages plus 2.5% of the unadjusted basis of depreciable, tangible
property used in the business also attributable to the same taxpayer. property used in the business also attributable to the same taxpayer.
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b. The reduction percentage is the ratio of the amount by which a taxpayer’s AGI exceeds the deduction’s b. The reduction percentage is the ratio of the amount by which a taxpayer’s AGI exceeds the deduction’s
lower income threshold to either $100,000 lower income threshold to either $100,000 (for joint filersfor joint filers) or $50,000 or $50,000 (for all other filersfor all other filers). The RP . The RP helps
determineis key to determining the amount by which the deduction without limits should be reduced when a taxpayer’s AGI falls the amount by which the deduction without limits should be reduced when a taxpayer’s AGI falls
in the SSTB and WQP phase-in range. in the SSTB and WQP phase-in range.
Net Operating Losses and the IRC 199A Deduction
Another aspect of theThe IRC Section 199A deduction IRC Section 199A deduction that cancan also affect a pass-through business’s affect a pass-through business’s
effective tax burden effective tax burden is thethrough its treatment of net QBI operating losses. When a pass-through business treatment of net QBI operating losses. When a pass-through business
owner realizes a owner realizes a Congressional Research Service 9 The Section 199A Deduction: How It Works and Illustrative Examples net operating loss (NOL) on his or her QBInet operating loss (NOL) on his or her QBI from all qualified businesses, the , the
deduction is $0 for that tax year.22 The deduction is $0 for that tax year.22 The lossNOL may be carried forward to the next year and treated as may be carried forward to the next year and treated as
a negative QBI that is a negative QBI that is then subtracted from any positive QBI for the year. A QBI NOL may be carried subtracted from any positive QBI for the year. A QBI NOL may be carried
forward until a taxpayer realizes a positive forward until a taxpayer realizes a positive QBI. In the year thatQBI against which the NOL can be offset. When such an offset happens, a taxpayer’s happens, a taxpayer’s current-
year positive QBI is reduced, but not below zero, by 20% of the carriedQBI is reduced, but not below zero, by 20% of the carried -over loss.23 over loss.23
Generally, no carryback of the loss is allowed, but the Coronavirus Aid, Relief, and Economic 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 Security Act (P.L. 116-136) permitted corporate and noncorporate businesses to carry back up to
five years NOLs incurred in 2018five years NOLs incurred in 2018 to 2020.24

, 2019, and 2020.24 22 For any individual, estate, or trust, the Section 199A deduction in a tax year is equal to 20% of QBI plus 20% of 22 For any individual, estate, or trust, the Section 199A deduction in a tax year is equal to 20% of QBI plus 20% of
qualified REIT dividends and qualified publicly traded partnership income. Negative QBI in a tax year results in no qualified REIT dividends and qualified publicly traded partnership income. Negative QBI in a tax year results in no
deduction for the business portion of that equation. deduction for the business portion of that equation.
23 For example, assume that John owns two pass-through businesses, Alpha and Beta. In year one, the QBI from Alpha 23 For example, assume that John owns two pass-through businesses, Alpha and Beta. In year one, the QBI from Alpha
is $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 is $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 $20,000 and Beta a QBI of $50,000. The $30,000 loss from year one is carried over to year two. To calculate his of $20,000 and Beta a QBI of $50,000. The $30,000 loss from year one is carried over to year two. To calculate his
Section 199A deduction for year two, John adds 20% of the combined QBI amount for that year ($70,000) to 20% of Section 199A deduction for year two, John adds 20% of the combined QBI amount for that year ($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 two: $14,000 - the 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. $6,000 = $8,000.
24 For more information, see CRS Insight IN11296, 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, , 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. , by Mark P. Keightley.
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Appendix. Final Regulations (TD 9847) on
Classifying Businesses as an SSTB
One significant issue addressed by the final regulations for the IRC Section 199A deduction was One significant issue addressed by the final regulations for the IRC Section 199A deduction was
what it meant to perform services in the professions of health care, law, accounting, actuarial what it meant to perform services in the professions of health care, law, accounting, actuarial
science, performing arts, consulting, athletics, financial services, and brokerage services. IRC science, performing arts, consulting, athletics, financial services, and brokerage services. IRC
Section 199A(d)(2) and (d)(3) deny the deduction to owners of these professional businesses if Section 199A(d)(2) and (d)(3) deny the deduction to owners of these professional businesses if
their taxable income is greater than the deduction’s upper income threshold. Owners of the same their taxable income is greater than the deduction’s upper income threshold. Owners of the same
set of businesses whose taxable income is below the lower income threshold are eligible for the set of businesses whose taxable income is below the lower income threshold are eligible 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 critically on the criteria the IRS employs to classify burden on profits from these SSTBs depends critically on the criteria the IRS employs to classify
firms engaged in these activities to varying degrees as SSTBs or non-SSTBs, making them firms engaged in these activities to varying degrees as SSTBs or non-SSTBs, making them
eligible for the deduction. eligible for the deduction.
For example, in the final regulations (TD 9847), the IRS noted that skilled nursing, assisted For example, in the final regulations (TD 9847), the IRS noted that skilled nursing, assisted
living, and similar facilities offer a range of services to residents. Consequently, whether those living, and similar facilities offer a range of services to residents. Consequently, whether those
facilities and their owners are eligible for the IRC Section 199A deduction depends on the “facts facilities and their owners are eligible for the IRC Section 199A deduction depends on the “facts
and circumstances” of each case. The final regulations did point out two instances where the and circumstances” of each case. The final regulations did point out two instances where the
income-producing activities of a facility providing medical services did not constitute health care income-producing activities of a facility providing medical services did not constitute health care
services under IRC Section 199A—and thus were eligible for the deduction, subject to the services under IRC Section 199A—and thus were eligible for the deduction, subject to the
limitations discussed earlier in this report. One was an extended care facility for senior citizens limitations discussed earlier in this report. One was an extended care facility for senior citizens
that earned its income solely from the living facilities it offered residents, while contracting with that earned its income solely from the living facilities it offered residents, while contracting with
outside entities to provide medical services to residents. The other was a surgery center that did outside entities to provide medical services to residents. The other was a surgery center that did
not employ health care professionals and billed patients only for facility costs related to surgical not employ health care professionals and billed patients only for facility costs related to surgical
procedures. procedures.
TD 9847 also specified that ownership of an athletic team fell within the scope of services not TD 9847 also specified that ownership of an athletic team fell within the scope of services not
eligible for the deduction, even though the owners did not directly engage in athletic activities, eligible 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 all services that may be performed by banks. The origination of loans by broad exemption for all services that may be performed by banks. The origination of loans by
securities dealers also fell outside the range of financial services considered SSTBs. securities dealers also fell 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 skill of one or more of its employees or owners. In this case, the asset was the reputation or skill 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
substantially reduce the amount of business income eligible for the deduction. substantially 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 million or less should be considered SSTBs. Under the rule, if less than 10% of receipts of $25.0 million 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 million in gross receipts. Owners threshold decreases to 5% for businesses with more than $25.0 million 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 will eligible for the deduction, difficult to determine the percentage of pass-through firms that will eligible for the deduction,
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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Congressional Research Service Congressional Research Service
R46402 R46402 · VERSION 35 · UPDATED
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