The Section 199A Deduction: How It Works
January 23, 2024
and Illustrative Examples
Gary Guenther
Congress made numerous changes to the taxation of individuals and corporate and noncorporate
Analyst in Public Finance
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
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
in corporate tax rates. To accommodate the owners, Congress added a new deduction for pass-through business under
Internal 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 199A deduction and cut in individual income tax rates are temporary:
they are available from 2018 to 2025.
IRC Section 199A allows individuals, trusts, and estates with pass-through business income to deduct up to 20% of qualified
business income (QBI) from 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 it is not covered in this
report.) QBI is the net amount of the 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 QBI in a year is the sum of the QBIs for all businesses.
The maximum deduction is the lesser of
• 20% of an owner’s QBI, or
• 20% of taxable income, excluding net capital gains.

Two limitations 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
a 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
• the specified service trade or business (SSTB) limitation, which reduces the maximum deduction an
owner may claim for an SSTB’s QBI. An SSTB is a trade or business involved in accounting; health care;
law; actuarial science; athletics; brokerage services; consulting; financial services; the performing arts;
investing and investment management; and 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 its owners or
employees.
The SSTB and WQP limitations phase in when an owner’s taxable income exceeds a lower income threshold, which is set at
$383,900 for joint filers and $191,950 for other filers in 2024. The limitations’ full impact is realized when taxable income
exceeds an upper income threshold ($483,900 for joint filers and $241,950 for other filers in 2024).
This report provides a brief overview of the deduction and five hypothetical examples of how it is calculated when the WQP
and SSTB limitations apply.

Congressional Research Service

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

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
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 tax rate structure to a single rate of
21%.
During the congressional debate over the tax bill, pass-through business owners sought tax relief
comparable to any reduction in corporate tax rates.2 In response, Congress added a new deduction
for pass-through businesses under Internal Revenue Code (IRC) Section 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 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
and individual income tax rate cuts are temporary: they are available from 2018 to 2025.
This report provides a brief overview of the deduction and several examples of how it is
calculated.
Overview of the Section 199A Deduction
Between 2018 and 2025, IRC Section 199A allows individuals, trusts, and estates with income
from pass-through businesses to deduct up to 20% of QBI in determining their federal tax
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
of it is not covered in this report.) The deduction is claimed on the Form 1040, after eligible
taxpayers take either the standard deduction or the sum of their itemized deductions.3
Several considerations are key in benefiting from 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 aggregate original cost of its
qualified assets acquired and placed in service in the past 10 years.
Who Qualifies for the Deduction?
The IRC Section 199A deduction applies to most business activities. The deduction’s 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 qualifies as an
IRC Section 162 business if it is conducted with “continuity, regularity, and the intent of earning a

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.
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.
3 See CRS Infographic IG10014, The U.S. Individual Income Tax System, 2019, by Molly F. Sherlock.
4 U.S. Department of the Treasury, Internal Revenue Service, “Qualified Business Income Deduction,” Final
Regulations, TD 9847, 84 Federal Register, 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
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
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 specified service
trade or business (SSTB) and a non-specified service trade or business (non-SSTB).
What Is a Specified Service Trade or Business?
IRC Section 199A(d)(2) specifies that an SSTB is any trade or business that
• provides services in accounting, health, law, actuarial science, athletics,
brokerage services, consulting, financial services, or the performing arts; or
• provides services in investing and investment management, trading, or dealing in
securities, partnership interests, or commodities; or
• derives much of its income from the reputation or skill of one or more of a firm’s
owners or employees.
There is considerable overlap between SSTBs and businesses that do not qualify for the IRC
Section 1202 exclusion from the long-term capital gains tax on the sale or exchange of qualified
small business stock. According to IRC Section 1202(e)(3)(A), qualified stock issued by the
following businesses is ineligible for the gains exclusion:
any trade or business involving the performance of services in the fields of health, law,
engineering, architecture, accounting, actuarial science, performing arts, consulting,
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
One difference between SSTBs and the businesses ineligible for the IRC Section 1202 gains
exclusion is that the latter includes engineering services and architecture and the former does not.
Since SSTBs generally are professional service firms whose success often depends on the skills
and reputation of their owners and employees, it is unclear why engineering services and
architecture are not classified as SSTBs.
The deduction’s final regulations addressed several issues regarding the classification 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 depends partly on the owner’s QBI,
which is 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 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
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...)
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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
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 every claim for the
deduction, while the other two apply only if a pass-through business owner’s AGI exceeds a
specified amount.7
The unavoidable limitation is an overall cap on the deduction a business owner may take in a tax
year, a cap that can be thought of as the maximum deduction. It is the lesser of
• the sum of 20% of an owner’s QBI and (if applicable) 20% of any REIT
dividends and PTP income the owner receives, or
• 20% of a taxpayer’s taxable income, less any net capital gain, which is equivalent
to an owner’s taxable ordinary income.
Two other limitations may apply:
• a wage and qualified property limitation (WQP), which reduces the maximum
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
• an SSTB limitation, which reduces and eventually nullifies the maximum
deduction an owner may claim for an SSTB’s 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 ($383,900 for joint filers and $191,950 for other filers in 2024). Their full impact is
realized when an owner’s AGI exceeds an upper income threshold ($483,900 for joint filers and
$241,950 for other filers in 2024). Table 1 shows the lower income and upper income thresholds
for both limitations from 2018 to 2024; the amounts have been indexed for inflation since 2019.

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
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
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=
startdown&id=5171.
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
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
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.
Special considerations apply to S corporations and partnerships in determining an owner’s allocable share.
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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
$315,000
$157,500
$415,000
$207,500
2019
$321,400
$160,700
$421,400
$210,700
2020
$326,600
$163,300
$426,600
$213,300
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
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, 2022-38, and 2023-34.
Notes: All other filers are single and head-of-household filers and married persons filing as a single person. The
amounts since 2019 have been indexed for inflation.
WQP Limitation
This limitation is based on 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
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
deduction may be claimed.
(2) An owner’s AGI falls in the phase-in range for the WQP limit: in this case, the maximum
deduction and the deduction with the full WQP limit are calculated and compared. The difference
between the two deductions is multiplied by a reduction percentage to determine a reduction
amount, which is subtracted from the maximum deduction to determine the deduction an owner
may claim.9
(3) An owner’s taxable income exceeds the upper income threshold: in this case, 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 owner’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
four possible outcomes:
(1) An owner’s AGI is less than the lower income threshold: in this case, the 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.
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(2) An owner’s AGI falls in the phase-in range but only the SSTB limit applies: the maximum
deduction is reduced by the SSTB limit.
The phase-in range for both the SSTB and WQP limits 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 a pass-through business owner’s AGI falls within the phase-in
range, the maximum deduction is reduced 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 determine the deduction’s RP. If only the SSTB limitation
applies, an owner’s QBI from an SSTB is reduced by an amount equal to (QBI x RP); the
deduction equals 20% of 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 maximum deduction is reduced first by a phased-in SSTB limit, and then by a
phased-in WQP limit.
The first step in calculating the deduction is to reduce the owner’s QBI from an SSTB and the
amount of the owner’s 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 AGI above the lower income threshold is 90% of
the phaseout range for a joint filer (i.e., $435,510 for married joint filers in 2024), 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%. 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 with the modified WQP limit.
The difference between those two deductions is multiplied by the RP, yielding 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 limits apply.
(4) An owner’s AGI exceeds the upper income threshold: no deduction may be claimed, as the
owner’s QBI comes entirely from an SSTB.
Five Hypothetical Examples
One way to understand how a complicated tax provision like the IRC Section 199A deduction is
intended to work is to calculate it under different scenarios. The following five scenarios illustrate
the effects of the SSTB and WQP limits on the same single filer with different AGI amounts in
2024; the effects are summarized in Table 2. The scenarios can be regarded as basic in that they
show 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 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 2024
• 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.
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In this scenario, James’s taxable income ($180,000) is below the lower income threshold for
single filers ($191,900) in 2024, allowing him to claim the maximum deduction, which is the
lesser of 20% of his QBI, or 20% of his ordinary income, or $28,000.10
Scenario 2: Taxable Income Is Above the Upper Income Threshold
for SSTB QBI only
Assume that in 2024
• James is a partner of a law firm (SSTB);
• he is a single filer with an AGI of $245,000 and no net capital gains; and
• his share of the SSTB’s QBI is $180,000.
Because this scenario involves a pass-through business owner with an AGI above the deduction’s
upper income threshold ($241,950) for a single filer in 2024 and a QBI the at comes entirely from
an SSTB, James may claim no deduction for that year.
Scenario 3: Taxable Income Is Above the Upper Income Limitation
for Non-SSTB QBI only
Assume that in 2024
• James owns a restaurant (non-SSTB) as a sole proprietor;
• he is a single filer with an AGI of $245,000 and no net capital gains;
• his QBI totals $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 placed in service in the previous 10
years is $100,000.
In this scenario, the QBI is entirely from a non-SSTB, and James’s AGI is above the upper
income threshold ($241,9500) for a single filer in 2024. 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
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 2024.12
Scenario 4: Taxable Income Is Within the Phase-in Range for the
SSTB and WQP Limits for Non-SSTB QBI only
Assume that in 2024
• 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
$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
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.
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• 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.
In this scenario, James’s QBI comes entirely from a non-SSTB, and his taxable income is within
the phase-in range for the WQP limit. The deduction he may claim for 2024 is equal to his
maximum deduction less the deduction under 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
income threshold, divided by $50,000 (the difference between the lower and upper income
thresholds for a single filer). In this case, the RP is 16%.13 His reduction amount is the product of
the RP and the difference between the deduction with no WQP limit and the deduction with the
full WQP limit. The deduction with no limit is $36,000,14 and the deduction under the full limit is
$30,000.15 As a result, the reduction amount is $960,16 and the IRC Section 199A deduction that
James may claim in 2024 is $35,040.17
Scenario 5: Taxable Income Is Within the Phase-in Range for the
SSTB and WQP Limitations for SSTB QBI Only
Assume that in 2024
• 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;
• 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
property is $60,000 and $100,000, respectively.
This scenario is the most complicated of the five because it requires calculating the deduction
under both the SSTB and the WQP 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 phase-in range for the two limitations, and his entire QBI comes from an SSTB.
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
his QBI. The reduced QBI is then multiplied by 20% to calculate the deduction he could claim
under the SSTB limit only. In this case, the deduction is $30,204.18
The next step is to determine his deduction with the WQP limit only, which is multiplying his RP
by the greater of 50% of James’s share of W-2 wages ($30,000),19 or the sum of 25% of those

13 $200,000 - $191,950 = $8,050, $8,050/$50,000 = 0.161, and 0.161 x 100 = 16.1%.
14 0.20 x $200,000.
15 See footnote 11.
16 $36,000 - $30,000 = $6,000, and $6,000 x 0.161 = $960.
17 $36,000 - $960 = $3,040.
18 This is the result of multiplying his RP (16%) by his QBI ($180,000), subtracting that amount ($28,980) from his
QBI, and then multiplying that amount ($151,020) by 20% (0.2 x $151,020 = $30,204).
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
($17,500).20 Thus, James’s deduction under the WQP limit only is $4,800.
In the final step, the difference between the deduction under the SSTB limit only ($30,204) and
the deduction under the WQP limit only ($4,8000) is multiplied by James’s RP (16%). The result
is subtracted from the deduction with no WQP limit ($30,204) to determine the Section 199A
deduction James may claim for the 2024 tax year: $26,139.21
This amount is about 25% less than the deduction James could claim in the fourth scenario, even
though the scenario 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 reflects 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 AGIs and QBIs.
Table 2. Summary of Five Scenarios for 2024
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 2024
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
2024 upper
upper income threshold.
income
threshold (see
Table 1). QBI
comes from an
SSTB only.
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 4:
No
Yes
The maximum deduction is
$35,040
Single filer’s AGI
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
non-SSTB only.
Scenario 5:
Yes
Yes
An owner’s deduction is
$26,139
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 are a
business’s W-2 wages less
those wages multiplied by the
RP. Adjusted property is the
original cost of a business’s
qualified assets, reduced by that
cost multiplied by the RP.b
Third, the difference between
the two deductions from steps
1 and 2 is multiplied by the RP.
The result is subtracted from
the deduction under the SSTB
limit with no WQP limit (step
1) to determine the deduction
an owner may claim.
Source: Congressional Research Service and Joint Committee on Taxation, Overview of Deduction for Qualified
Business Income: Section 199A, March 2019.
Notes:
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
property used in the business also attributable to the same taxpayer.
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 (for joint filers) or $50,000 (for all other filers). The RP is key
to determining 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.
Net Operating Losses and the IRC 199A Deduction
The IRC Section 199A deduction can also affect a pass-through business’s effective tax burden
through its treatment of net QBI operating losses. When a pass-through business owner realizes a
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The Section 199A Deduction: How It Works and Illustrative Examples

net operating loss (NOL) on his or her QBI, the deduction is $0 for that tax year.22 The NOL may
be carried forward to the next year and treated as a negative QBI that is then subtracted from any
positive QBI for the year. A QBI NOL may be carried forward until a taxpayer realizes a positive
QBI against which the NOL can be offset. When such an offset happens, a taxpayer’s positive
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, 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
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.
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
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
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.
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.
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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 IRC Section 199A deduction was
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
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
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
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
firms engaged in these activities to varying degrees as SSTBs or non-SSTBs, making them
eligible for the deduction.
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
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
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
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
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
procedures.
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,
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,
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
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.
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
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,
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,
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, 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.
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
a separate SSTB by the related parties.
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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
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
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
or business.
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,
regardless of their owners’ taxable income.

Author Information

Gary Guenther

Analyst in Public Finance

Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan
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under the direction of Congress. Information in a CRS Report should not be relied upon for purposes other
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Congressional Research Service
R46402 · VERSION 5 · UPDATED
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