Section 199A deduction: What is it and how do you qualify in 2026?

While most business owners are familiar with common write-offs and tax breaks, you may be overlooking a powerful tax benefit. The Section 199A deduction could allow you to deduct up to 20% of your business income from your taxes.

Taking advantage of this deduction, which was recently made permanent with the signing of the One Big Beautiful Bill Act (OBBBA), may help save a bundle. 

Let's explore how this deduction works and whether your business qualifies for this valuable tax benefit.

Jump to:

• What is the Section 199A deduction?
• Key components of the Section 199A deduction
• Section 199A deduction eligibility criteria
• Calculating the Section 199A deduction
• Income limits and phase-outs for Section 199A
• Rental property and investment with Section 199A
• Multiple businesses and Section 199A
• Common pitfalls to avoid with Section 199A deductions
• Find peace of mind come tax time

What is the Section 199A deduction? 

The Section 199A deduction, also known as the Qualified Business Income (QBI) deduction, allows eligible business owners to deduct up to 20% of their qualified business income.

The Section 199A deduction can significantly reduce your tax burden. Consulting with tax services can help determine your eligibility and maximize your deduction, tailored to your specific business situation.

Think of it as the government's way of giving qualified small business owners a significant tax break. If you're running a pass-through business like a sole proprietorship, partnership, or S corporation, you can reduce your tax bill by thousands of dollars.

How much can businesses deduct? 

Using the deduction, domestic businesses can deduct roughly 20% of their QBI, along with 20% of their publicly traded partnership income (PTP) and real estate investment trust (REIT) income.

Is the deduction limited?

The deduction is limited to 20% of taxable income, but may be less depending on your situation. For instance, specified service trades or businesses (SSTBs), such as businesses performing health, law, and accounting services, may only get a partial deduction when their income falls within the phase-out range.

Key components of the Section 199A deduction

Income limits, complex calculations, and even business type restrictions can make the QBI deduction rules pretty complicated. Let’s review some of the key eligibility components of this tax law. 

Qualifying businesses and participants

The QBI deduction sets forth specific criteria for what a qualifying business and participant are. The main rule is that deduction is only allowed for pass-through entities. 

Common examples include: 

• Sole proprietorships
• Partnerships
• S corporations
• Certain trusts and estates

You need not physically or materially participate to qualify for the deduction.

Specified service trades or businesses (SSTBs)

The guidelines for this law include specific limitations for businesses categorized as specified service trades or businesses (SSTBs). This type of business is defined as one whose main asset is the reputation or skill of its employees or owners. 

Common examples include: 

• Law firms
• Wealth management firms
• Doctors offices
• Sports teams
• Music bands
• Brokerage firms

These and other SSTBs have strict income limitations for deduction eligibility. 

W-2 wage tracking and calculation

For higher-earning businesses, the QBI deduction is limited by the amount of W-2 wages you paid, in addition to the type of business you operate. 

To accurately determine the deduction amount you qualify for, you need to keep detailed records of W-2 wages, including bonuses and incentives. You’ll also need to record and track the unadjusted basis immediately after acquisition (UBIA) for physical assets. 

Solid payroll software, like QuickBooks, can help you seamlessly track your wages paid each year and provide you with a simple way to record your UBIA.  

Self-employment tax

For independent contractors and sole proprietors, the rules are largely the same. However, this deduction will not reduce your self-employment tax. Your full earnings will be subject to self-employment tax, but the QBI will decrease your taxable income for the personal part of your tax. 

For example, if your net profit is $25,000, your QBI deduction would be $5,000. The self-employment tax would be calculated based on the full $25,000, while the personal or employee portion would be calculated using the lower $20,000 amount.

Section 199A deduction eligibility criteria

Not all businesses will qualify for the QBI deduction. Depending on your business type, income source, or income level, you may be eligible for a partial or no deduction at all. Let’s explore the eligibility criteria in more detail. 

Pass-through and domestic business requirements

Only owners of pass-through entities will qualify for the deduction. This includes: 

• Sole proprietors
• Partnership participants
• Owners of S corporations
• Owners of LLCs

Additionally, your business must operate within the US, and business income must be derived from a US trade or business. Owners of C corporations and those who earned W-2 income from the business are not eligible for this deduction. 

Income and taxable income thresholds

To qualify for the full deduction in 2025, your business income must be less than $394,600 for married filing jointly and $197,300 for all other filers.

For a partial deduction, the phase-in range is: 

• $394,600 and $494,600 for married filing jointly
• $197,300 and $247,300 for all other filers

However, the calculation for a partial deduction changes. For regular businesses, the partial deduction will gradually shift from 20% of QBI to the wage and property limitation as income increases. For SSTBs, the deduction is reduced from 20% of QBI to 0% as income increases over the phase-in range.

Above the maximum threshold, SSTBs will not be eligible for the deduction, while all other businesses will need to use the wage and property calculation to determine their deduction amount. 

A new minimum deduction

With the signing into law of the OBBBA, a new minimum deduction has been added for businesses with a reduced income. Any taxpayer who earns at least $1,000 in qualified business income is eligible for a minimum $400 deduction. 

However, there is one caveat to this new provision. Unlike the regular QBI deduction, you must materially participate in the business to qualify for the minimum deduction. 

Qualifying and excluded income types

Not all income is considered qualified business income. Generally speaking, QBI consists of net income from a domestic pass-through business, as well as income from rental properties, REIT dividends, and publicly traded partnerships. 

This means other types of income are excluded, like: 

• Capital gains and losses
• Non-REIT dividends
• Shareholder payments
• Wage income
• Guaranteed payments from a partnership

If you have the above types of income, you may still be able to qualify for the QBI deduction, so long as you have non-excluded income. 

Calculating the Section 199A deduction

The actual Section 199A deduction you'll receive depends on several factors and limitations. However, the basic QBI calculation formula is: 

Qualified Business Income (QBI) x 20% = Potential Deduction 

If your QBI is $100,000, your potential deduction would be 20% of that or $20,000 ($100,000 x 20%). In other words, your deduction cannot exceed 20% of your taxable income minus net capital gains. For example, say your total taxable income is $150,000, and you have capital gains of $30,000. Your adjusted taxable income is $120,000, making the maximum possible deduction $24,000 ($120,000 x 20%).

Income limits and phase-outs for Section 199A

When it comes to calculating your QBI deduction, income is key. Here are the limits and phase-out ranges for the deduction. 

Full deduction

The full 20% QBI deduction is available for any business (including SSTBs) that falls below the threshold. For 2025, this threshold is $394,600 for married filers and $197,300 for all other filers. 

Neither your W-2 wages nor qualified property will impact your deduction calculation. 

Phase-out range

For those exceeding the full deduction income threshold, a phase-out range may allow you to claim a partial deduction. This range is: 

• $394,600 and $494,600 for married filing jointly
• $197,300 and $247,300 for all other filers

Within this range, you may have to use the wage + property calculation instead of the 20% calculation. 

Deduction limitations for high-income earners

For high-income-earning businesses, the deduction will be based on the wage + property calculation. This means your partial deduction will be the lesser of:

• 50% of your W-2 wages paid
• 25% of your W-2 wages paid + 2.5% of the unadjusted basis of qualified property

Businesses that are categorized as SSTBs are required to use the above calculation when they fall in the phase-out range. Above these maximums ($494,600 or $247,300), SSTBs are not eligible for the QBI deduction. 

Rental property and investment with Section 199A

Rental real estate income from tangible property can qualify as business income, subject to the same thresholds established for single and joint filers. However, not all rental activities automatically qualify, and property owners must meet specific criteria to benefit from this deduction.

To qualify rental activities as a trade or business under Section 199A, property owners must demonstrate three key elements:

1. Regular and continuous activity: You must spend regular time on rental activities, such as regular maintenance and tenant interactions. 
2. Profit motive: You need a clear intention to generate profit with business-like operations.
3. Material participation: You need regular, continuous, and substantial involvement and document your time investment.

The IRS has safe harbor provisions that provide a pathway for rental real estate enterprises to become a qualified trade or business under Section 199A. These require:

• Separate books and records for each property
• Detailed income and expense tracking
• Dedicated bank accounts

What about Section 199A dividends?

In addition to rental income, certain real estate investment trusts (REITs) and publicly traded partnerships (PTPs) can qualify for the QBI deduction. REITs and PTPs that have qualifying Section 199A dividends will see this income listed in Box 5 of their 1099-DIV. 

The deduction is still 20% of income; however, there are no income limitations. So, no matter how high your income is, you can claim the full QBI deduction for all qualified 199A dividends.

Multiple businesses and Section 199A

For taxpayers with multiple businesses, knowing how to calculate, combine, and track various business interests is very important. Managing multiple businesses under Section 199A requires attention to three key areas: 

QBI netting rules

When you own multiple businesses, all qualified business income must be netted across your enterprises. This means positive QBI from one business offsets negative QBI from another, with the net amount determining your overall deduction eligibility. 

For example, if Business A generates $50,000 in QBI while Business B has a loss of $30,000 in QBI, your net QBI would be $20,000.

Loss carryover rules

The handling of losses under Section 199A follows specific rules that affect both current and future year calculations. When your total QBI is negative in a given year, this loss must be carried forward to reduce your QBI in the following year. 

Aggregation rules

The IRS allows certain related businesses to aggregate for Section 199A purposes, which can provide benefits in meeting wage and property tests. To qualify for aggregation, businesses must share at least 50% common ownership, operate on the same tax year, and cannot be SSTBs. 

Additionally, they must meet two of three relationship tests: 

• Offering similar products or services
• Sharing facilities or business elements
• Operating in coordination with each other

Once you elect to aggregate businesses, you must maintain this treatment consistently in future years and provide annual disclosure.

Common pitfalls to avoid with Section 199A deductions

The complexity of the Section 199A deduction creates numerous opportunities for errors. Understanding common pitfalls can help you avoid costly mistakes and potential penalties. To protect yourself and your business, understand the following:  

• Documentation requirements: Maintaining records is a key part of Section 199A compliance. Essential income documentation includes profit and loss statements, bank statements, sales receipts, invoices, and 1099 forms. 
• Correctly calculating your deduction: The IRS takes Section 199A compliance seriously and can impose significant penalties for miscalculations. Accuracy-related penalties include a 20% charge on tax underpayment, with additional penalties for gross misstatements. 
• Conducting regular self-audits: Do this to review qualification criteria, check calculation accuracy, verify documentation completeness, and assess potential red flags.

Keep records for at least seven years and document all calculation methods. And the foundation of Section 199A rules starts with the domestic business requirement: 

Only income generated within the US qualifies. Foreign-sourced income and operations conducted outside the US borders are explicitly excluded from consideration.

Find peace of mind come tax time 

Taking the QBI deduction can result in significant tax savings, but calculating the exact amount of the deduction you qualify for can be complicated. You want to take the maximum you’re eligible for, and you also want to avoid making a mistake that could result in a hefty tax penalty. 

To take full advantage of the QBI deduction, learn more about the integrated tax tools in QuickBooks accounting software.