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Pass-through Business Deduction

Updated: Dec 22, 2022

By XinXin Ru, on December 21, 2022

The passthrough business deduction - referred to as the §199A deduction or the deduction for qualified business income - was created by the Tax Cuts and Jobs Act of 2017. The deduction is available for tax years beginning after Dec. 31, 2017, but, will expire in 2026.


Section 199A provides a deduction of up to 20 percent of income from a domestic business operated as a sole proprietorship or through a partnership, S corporation, trust, or estate. The §199A deduction may be taken by individuals and by some estates and trusts. The deduction is not available for wage income or for business income earned through a C corporation.

For taxpayers whose taxable income exceeds a statutorily-defined amount (threshold amount), §199A limits the deduction based on (i) the type of trade or business engaged in by the taxpayer, (ii) the amount of W-2 wages paid with respect to the trade or business, and/or (iii) the unadjusted basis immediately after acquisition (UBIA) of qualified property held for use in the trade or business. These statutory limitations are subject to phase-in rules based upon taxable income above the threshold amount.

Section 199A also allows individuals and some trusts and estates (but not corporations) a deduction of up to 20 percent of their combined qualified REIT dividends and qualified PTP income, including qualified REIT dividends and qualified PTP income earned through passthrough entities. This component of the section 199A deduction is not limited by W-2 wages or UBIA of qualified property.


Section 199A basically creates two deductions, one for pass-through entities and the other for agricultural & horticultural cooperatives

  • Passthrough Entities Deduction - 199A(a)

Section 199A(a) provides a deduction of up to 20 percent of qualified business income (QBI) from a domestic business operated as a sole proprietorship or through a partnership, S corporation, trust, or estate.

The deduction can be taken by individuals and by some estates and trusts. However, only items attributable to a qualified trade or business are taken into account in determining the §199A deduction for QBI.

  • Agricultural & Horticultural Cooperatives Deduction - §199A(g)

Corporations organized as cooperatives are subject to Subchapter T of the Internal Revenue Code and, like other C corporations, are taxed at the entity level. However, cooperatives can shield some or all of their net income from taxation by returning it to the patrons (owners) in the form of qualified patronage dividends.

Under §199A(g), specified agricultural or horticultural cooperatives and their “patrons” who receive qualified payments from the cooperatives may claim a special entity-level deduction from taxable income that is substantially similar to the domestic production activities deduction under former §199. As provided in the Consolidated Appropriations Act (a 3/23/2018 technical correction to the TJCA), this special deduction is equal to nine percent of the lesser of:

(a) the cooperative’s qualified production activities income, or

(b) taxable income (without the §199A(g) deduction or any deduction under §1382(b) & (c)) for the taxable year.

The amount of the deduction for a taxable year is limited to 50 percent of the W-2 wages paid by the cooperative during the calendar year that ends in such taxable year.

Exclusions, Limits, & Restrictions

While a taxpayer may deduct up to 20 percent of certain domestic qualified business income (QBI) from a partnership, S corporation, or sole proprietorship, the §199A deduction is subject to a specified service trade or business exclusion, a wage/capital limit, an overall ceiling limit and certain other restrictions.

  • Specified Service Trade or Business Exclusion

Specified service trades or businesses (SSTBs) are excluded from the definition of qualified businesses permitted to take the §199A deduction (§199A(d)(1)(A) & (B)). However, this rule is reversed and SSTBs are treated like other businesses if the taxpayer's taxable income does not exceed the threshold amount.

Unfortunately, the exclusion does start to phase-in and the §199A deduction phase-out when the taxpayer's taxable income reaches the threshold amount ($170,050 or $340,100 for a joint return in 2022).

When the taxpayer's taxable income exceeds the threshold amount plus $50,000 or $100,000 for a joint return the SSTB is completely excluded, cannot produce qualified business income, and, therefore, is not eligible for the §199 deduction.

  • Wage/Capital Limit

When a taxpayer’s taxable income is in excess of the threshold amount plus $50,000 (or $100,000 in the case of a joint return) and the taxpayer owns a qualified trade or business, the QBI deductible amount is subject to a wage/capital limit (§199A(b)(2)(B)). Under this limit, the deductible QBI amount for each business included in a taxpayer's combined QBI is limited by a 50% wage test, or a combined 25% wage and capital test.

  • Overall Ceiling Limit - The Final Frontier

Even when available and after the wage/capital limit, the §199A deduction cannot exceed 20 percent of the taxpayer's taxable income in excess of any net capital gain (§199A(a)(2)(A)&(B)). In essence, all §199A calculations are tentative until all limits are applied including the overall ceiling limit.

  • Restrictions & Special Rules

  1. The deduction is not available for wage income or for business income earned through a C corporation.

  2. Performing services as an employee is not a qualified trade or business

  3. The deduction is not allowed in determining an individual's adjusted gross income, but instead is a deduction reducing taxable income.

  4. It is not an itemized deduction but is available to individuals who itemize or claim the standard deduction. In short, the deduction is from AGI.

  5. The deduction cannot be more than a taxpayer’s taxable income (reduced by net capital gain) for the tax year.

  6. The deduction cannot generate a net operating loss.

  7. The deduction does not reduce net earnings from self-employment under §1402 or net investment income under §1411.

  8. The deduction is allowed for alternative minimum tax purposes

  9. For purposes of §199A, taxable income is determined without regard to the §199A deduction allowable.

  10. In the case of a partnership or S corporation, §199A applies at the partner or shareholder level.


Yen-Yi Anderson, Managing Partner of Anderson & Associates, founded the law firm in January 2014. Yen-Yi Anderson focuses her practice on business immigration and non-immigration visas(H1B/EB1/ EB2/EB3/EB5, etc), commercial law, and civil litigation.

Xinxin Ru, Licensed CPA. Ms. Ru specializes in tax planning and preparation as well as financial reporting and analysis. As an experienced CPA professional, she provides a wide range of tax, accounting and reporting services for corporate and individual clients.

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