Overview
Many individuals, including owners of businesses operated through sole proprietorships, partnerships, S corporations, trusts, and estates, may be eligible for a qualified business income deduction, also called the section 199A deduction. Some trusts and estates may also claim the deduction directly.
The deduction allows them to deduct up to 20 percent of their qualified business income (QBI), plus 20 percent of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income. Income earned by a C corporation or by providing services as an employee isn’t eligible for the deduction.
The deduction is available for tax years beginning after December 31, 2017. Eligible taxpayers can claim it for the first time on their 2018 federal income tax returns filed in 2019.
Components of the Deduction
QBI Component
This component of the deduction equals 20 percent of QBI from a domestic business operated as a sole proprietorship or through a partnership, S corporation, trust, or estate. Depending on the taxpayer’s taxable income, the QBI Component is subject to limitations including:
- The type of trade or business
- The amount of W-2 wages paid by the qualified trade or business
- The unadjusted basis immediately after acquisition (UBIA) of qualified property held by the trade or business
These limitations do not apply to taxpayers with taxable income at or below a certain threshold. For 2018, the threshold amount is:
- $315,000 for a married couple filing jointly
- $157,500 for all other taxpayers
It may also be reduced by the patron reduction if the taxpayer is a patron of an agricultural or horticultural cooperative.
REIT/PTP Component
This component equals 20 percent of qualified REIT dividends and qualified PTP income. This component is not limited by W-2 wages or the UBIA of qualified property. Depending on the taxpayer’s taxable income, the amount of PTP income that qualifies may be limited if the PTP is engaged in a specified service trade or business.
The deduction is limited to the lesser of the QBI component plus the REIT/PTP component or 20 percent of the taxable income minus net capital gain. The deduction is available regardless of whether an individual itemizes deductions on Schedule A or takes the standard deduction.
Qualified Trade or Business
A qualified trade or business is any section 162 trade or business, with three exceptions:
- A trade or business conducted by a C corporation.
- For taxpayers with taxable income exceeding the threshold amount, specified services trades or businesses (SSTBs). SSTBs involve the performance of services in the fields of:
- Health
- Law
- Accounting
- Actuarial science
- Performing arts
- Consulting
- Athletics
- Financial services
- Investing and investment management
- Trading, dealing in certain assets
- Any trade or business where the principal asset is the reputation or skill of employees or owners
This includes income from endorsing products or services, the use of an individual’s image, likeness, voice, or other personal attributes, or appearances in media.
3. Performing services as an employee.
Threshold Limits for SSTBs (2018)
- $315,000 for married filing jointly
- $157,500 for all others
Limitations are phased in for:
- Joint filers with taxable income between $315,000 and $415,000
- All other taxpayers with taxable income between $157,500 and $207,500
Threshold amounts and phase-in ranges are adjusted for inflation in later years.
For more information on what qualifies as a trade or business, refer to Publication 535 – Determining Your Qualified Trades or Businesses.
Rental Real Estate Enterprise Safe Harbor
A safe harbor is available solely for the purposes of 199A for individuals and owners of passthrough entities. Under this safe harbor, a rental real estate enterprise will be treated as a trade or business for QBI deduction purposes.
For more information on the safe harbor, see Notice 2019-07.
Taxpayers may still treat rental real estate that does not meet the safe harbor as a trade or business if it otherwise qualifies as a section 162 trade or business.
Qualified Business Income (QBI)
QBI is the net amount of qualified items of income, gain, deduction, and loss from any qualified trade or business, including income from partnerships, S corporations, sole proprietorships, and certain trusts. These includable items must be effectively connected with the conduct of a trade or business within the United States and included in taxable income.
QBI Includes Deductions for:
- Self-employment tax (deductible part)
- Self-employed health insurance
- Contributions to qualified retirement plans (SEP, SIMPLE, qualified plans)
QBI Exclusions:
QBI does not include:
- Items not properly includible in income, such as disallowed losses or deductions
- Investment items such as capital gains/losses or dividends
- Interest income not allocable to a trade or business
- Wage income
- Income not effectively connected with U.S. business conduct
- Commodities transactions or foreign currency gains/losses
- Income, loss, or deductions from notional principal contracts
- Annuities (unless connected to the business)
- Amounts received as reasonable compensation from an S corporation
- Guaranteed payments from a partnership
- Payments to partners for non-partner services
- Qualified REIT dividends
- Qualified PTP income
Information for Computing the Qualified Business Income Deduction
Use Form 1040 Instructions if:
- The taxpayer has QBI, qualified REIT dividends, or qualified PTP income
- 2018 taxable income before QBI deduction is not more than $157,500 ($315,000 if married filing jointly)
- The taxpayer is not a patron in a specified agricultural or horticultural cooperative
Use Publication 535 if:
- The taxpayer has QBI, qualified REIT dividends, or qualified PTP income
- 2018 taxable income before QBI deduction is more than $157,500 ($315,000 if married filing jointly)
- The taxpayer is a patron in a specified agricultural or horticultural cooperative
Cooperatives
Specified agricultural or horticultural cooperatives are allowed a deduction for income attributable to domestic production activities, similar to the former section 199 domestic production activities deduction. These cooperatives are subject to Part I of subchapter T and are engaged in:
- Manufacturing
- Production
- Growth or extraction (in whole or significant part) of agricultural or horticultural products
- Marketing of such products
Frequently Asked Questions
Who qualifies for the Qualified Business Income (QBI) deduction?
Individuals with income from sole proprietorships, partnerships, S corporations, trusts, and estates may qualify, provided the income meets certain conditions. C corporation income and employee wages are not eligible.
How much can I deduct under the QBI deduction?
Eligible taxpayers may deduct up to 20% of their qualified business income, plus 20% of qualified REIT dividends and qualified PTP income, subject to specific limitations based on income levels and business type.
What types of businesses are not considered qualified trades or businesses?
C corporations, employees, and certain Specified Service Trades or Businesses (SSTBs) such as those in health, law, consulting, and financial services may not qualify if income exceeds the threshold.
Does rental real estate qualify for the QBI deduction?
Rental real estate may qualify if it meets safe harbor requirements or otherwise qualifies as a section 162 trade or business. IRS Notice 2019-07 provides specific guidance on the safe harbor criteria.
How do I determine which IRS resources to use when calculating my deduction?
Use the Form 1040 Instructions if your taxable income is within the basic thresholds. If your income exceeds the limits or you are part of a cooperative, use IRS Publication 535 for guidance.