Section 199A allows up to a 20% deduction on pass-through business income, subject to income phase-outs and Specified Service Trade or Business (SSTB) restrictions.
The Section 199A QBI deduction allows owners of pass-through businesses (sole proprietorships, partnerships, S-Corps) to deduct up to 20% of qualified business income. The deduction reduces federal taxable income (not AGI) and was made permanent by OBBBA.
The deduction is the lesser of:
Below the income threshold, almost everyone gets the full 20%. Above the threshold, two layers of limitation kick in:
Above the phaseout, SSTB businesses lose the deduction entirely; non-SSTB businesses are subject to the wage/UBIA limitation.
The IRS defines Specified Service Trade or Business broadly — health, law, accounting, actuarial, performing arts, consulting, athletics, financial services, brokerage services, investing, investment management, trading, and "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 or owners."
S-Corp owner-employees: only the distribution portion is QBI, not the W-2 wages. Pushing your reasonable comp too low can hurt the QBI limit calculation (since W-2 wages factor into the deduction above the threshold).
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