Qualified Business Income Deduction (Section 199A)
Section 199A allows eligible taxpayers a deduction of up to 20% of qualified business income from pass-through entities and sole proprietorships, reducing the effective tax rate on business income.
Explanation
The QBI deduction applies to individuals, trusts, and estates receiving income from qualified trades or businesses operated through pass-through entities. The deduction is the lesser of 20% of QBI or 20% of taxable income (before the QBI deduction) minus net capital gains. Above certain income thresholds, the deduction is limited by W-2 wages paid and/or the unadjusted basis of qualified property. Specified service trades or businesses (SSTBs) — such as law, accounting, consulting, and financial services — are phased out at higher income levels.
Key Points
- •Deduction = up to 20% of qualified business income
- •W-2 wages and property basis limitations apply above income thresholds
- •SSTBs (law, accounting, consulting, health) phase out at higher income levels
Exam Tip
Below the threshold, all pass-through income qualifies for the full 20% deduction. Above the threshold, you must apply the W-2 wages/UBIA limitation.
Frequently Asked Questions
Related Topics
Individual Tax Planning
Individual tax planning involves strategies to minimize a taxpayer's current and future tax liability through timing of income and deductions, use of tax-advantaged accounts, and entity structure decisions.
Corporate Tax Planning
Corporate tax planning involves structuring business transactions and operations to minimize the overall tax burden while complying with tax laws and regulations.
Test your knowledge
Practice scenario-based questions on this topic with detailed explanations.