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Section 199A: Qualified Business Income Deduction (QBID)

Qualified Business Income Deduction Explained

Calculating the qualified business income deduction in the Tax Cuts and Jobs Act (TCJA) Era


The following information is not intended to be written advice concerning Federal tax matters subject to the requirements of Treasury Department Circular 230.

The information that follows is general in nature and is not intended to apply to any individual or entity’s particular circumstances. Although the information provided is intended to be timely and accurate, we cannot guarantee its accuracy on future dates. No individual or entity should act on this information without the advice of a professional and careful consideration of the particular circumstances.

The QBID amounts are subject to annual adjustment. This blog uses the amounts as of 2019. However, even if the amounts have changed, the principles and rules have not.

We have elected to not show married filing separately. A person who understands married filing jointly should also be able to apply the concepts to understand married filing separately. The married filing separately amounts can be found on the IRS website.

This was published on December 16, 2019, and the information below may become inaccurate with changes in laws, regulations, and the promulgation of laws. 

What is the qualified business income deduction?

When Congress passed the Tax Cuts and Jobs Act (TCJA), it reduced the C corporation tax rate from 35% to 21%. Congress did not want to disadvantage owners of pass-through entities (sole proprietors, S corporations, and partnerships) by leaving them with a substantially higher tax liability than C corporations. Congress reduced this tax burden by creating Section 199A, also known as the Qualified Business Income Deduction (QBID).

The QBID is the last deduction before determining a taxpayer’s taxable income. It is based on qualified business income (QBI). The QBID is a below-the-line deduction. Thus, the QBID can be paired with either the standard deduction or itemized deductions.

QBI must come from a flow-through entity. This includes business income from a sole proprietorship (reported on Schedule C of Form 1040), a partnership (reported on Form 1065), or an S Corporation (reported on Form 1120S).

  • A taxpayer’s share of an S Corporation or partnership’s qualified business income and wages and property (discussed below) will be reported to them on Schedule K-1.

QBI must be income effectively connected with (1) conducting a trade or business within the United States or Puerto Rico and (2) included in determining taxable income for the tax year. However, amounts paid to taxpayers for reasonable compensation (e.g., wages and guaranteed payments) do not count as QBI. For Sec. 199A, Congress divided pass-through entities into two categories:

  • Specified service trades or businesses
  • Qualified trades or businesses

Specified service trades or businesses

In general, a specified service trade or business (SSTB) is any trade or business in which the principal asset is the reputation or skill of one or more of its employees. Specifically, SSTBs include the following types of trades and businesses:

  • Health (e.g., physicians, nurses, dentists, and other similar healthcare professionals)
    • Health does not include services not directly related to a medical field, such as medical device sales, coding, billing, and payment processing.
  • Law
  • Accounting
  • Actuarial science
  • Performing arts
  • Consulting
  • Athletics
  • Financial services (e.g. financial advisors, wealth planners, retirement advisors, investment bankers, brokerage services, and other professionals performing similar services)
    • This includes any professional service consisting of investing, investment management, trading or dealing in securities, partnership interests, or commodities.

Additionally, an SSTB is any trade or business wherein a principal earns income (e.g., fees, licenses, or compensation) for any of the following activities:

  • Endorsing products or services
  • Use of the principal’s likeness, image, name, etc.
  • Appearance fees for an event or media performance (e.g., radio, TV, etc.)

Trades and businesses specifically not considered SSTBs include:

  • Architects
  • Engineers
  • Real estate agents and brokers
  • Insurance agents and brokers

Qualified trades or businesses

In general, a qualified trade or business is any pass-through entity not considered an SSTB. Specifically, a pass-through entity can be identified as a qualified trade or business if it has QBI.

Other Section 199A rules

Taking the Sec. 199A deduction does not affect the taxpayer’s basis (outside adjusted basis or shareholder’s accumulated adjustment’s account) in the pass-through entity.

In addition to SSTBs and qualified trades or businesses, taxpayers can deduct qualified REIT dividends and qualified publicly-traded partnership income. The IRS defines qualified REIT dividend income neither as a capital gain dividend nor a qualified dividend income. Due to these extensive limitations, many tax professionals are waiting for further guidance from the IRS to determine how a REIT dividend could practically be considered a qualified REIT dividend.


How to calculate the qualified business income deduction

Before introducing the 4 steps needed to calculate the QBID, it’s helpful to think of the deduction being limited as follows:

  • A taxpayer is never going to be able to take a deduction greater than 20% of QBI.
  • This deduction will be less than 20% of QBI if the taxpayer is single and makes more than $160,700 or is married filed jointly and makes more than $321,400.
  • Taxpayers may need to further reduce their deduction by an overall limitation.

If you understand these 3 limits, it’s harder to get lost in the weeds as we go into more detail on how to calculate the QBID.

Each of the following steps are discussed in greater detail in the next section.

Step 1 – Determine the QBI for every pass-through entity

This information will be reported on a Schedule K-1 (or a Schedule C if the entity is a sole proprietorship). Thus, this step is completed or determined by the pass-through entity and provided to the taxpayer. This step should be “easy” for the individual since the information is provided by the relevant entity or entities. In practice, many tax professionals will be completing both the pass-through entity’s tax forms and the individual’s tax forms.

See the details of Step 1 below.

Step 2 – Reduce QBID for each pass-through entity based on limits

The most a taxpayer will be able to deduct is 20% of QBI.

The allowed QBID for each pass-through entity can be reduced to less than 20% if the taxpayer’s income is in the phase-in range (of W-2 wage limit) or beyond the upper threshold.

  • Single taxpayers reach the phase-in range once taxable income exceeds $160,700 and enter the upper threshold at $210,700.
  • Married Filing Jointly taxpayers reach the phase-in threshold when taxable income exceeds $321,400 and enter the upper threshold at $421,400.

See the details of Step 2 below.

Step 3 – Combine all of the QBIDs

If a taxpayer has more than one pass-through entity with QBI, these amounts must be combined.

A taxpayer determines the combined QBID by adding together the allowed QBID amount for each respective entity. If there is only one pass-through entity, then the QBID for the one entity is the combined QBID.

See the details of Step 3 below.

Step 4 – Apply overall limitation

The final step is to apply the overall limitation to the combined QBID to determine the correct amount to deduct. This amount is then reported on line 10 of Form 1040.

See the details of Step 4 below.

QBID Calculation Worksheets

Two forms for taxpayers to compute their QBID for 2019 have been made available by the IRS.

Form 8995 Qualified Business Income Deduction Simplified Computation is for taxpayers who

  1. Have QBI, REIT dividends, or PTP income;

  2. Are not a patron in a specified agricultural or horticultural cooperative; and

  3. Have taxable income at or below the taxable income threshold amounts.

    • Single or head of household threshold amount: $160,700 or less

    • Married filing jointly threshold amount: $321,400 or less

NOTE: The instructions for Form 8995 will contain a 2 page QBI flow chart to assist the taxpayer with determining if an item of income, gain, deduction, or loss is included in QBI.

Form 8995-A Qualfied Business Income Deduction is for taxpayers who have QBI, REIT dividends, or PTP income and

  1. Are a patron in a specified agricultural or horticultural cooperative or
  2. Have taxable income exceeding the threshold amounts.

Detailed procedures for each step in calculating QBID

Now that you have a basic understanding of each step in this process, we’ll go through each step in detail.

Step 1 – Determine the qualified business income for each entity

To determine QBI:

  1. Ensure the entity is a relevant pass-through entity (i.e., sole proprietor, S corporation, partnership, estate, or trust).
  2. Determine whether the entity is directly owned by the taxpayer (i.e., a K-1 is sent directly to the taxpayer as a direct owner of a pass-through entity or business income is reported on Schedule C).
  3. Calculate the net income, gain, deduction, and loss with respect to any trade or business, limited to amounts:
    • Effectively connected with the conduct of a trade or business within the United States and Puerto Rico AND
    • Included or allowed in determining taxable income for the taxable year
  4. Further reduce net income by:
      • Capital gains and losses
      • Dividends
      • Non-operating interest income
      • Interest income attributable to working capital
      • Gains or losses relating to transactions in commodities
      • Foreign currency gains
        • The IRS lists “excess foreign currency gains.” For most taxpayers, this effectively means any foreign currency gains.
      • The amount of any less-than-reasonable salary payment to owners.
        • If the taxpayer paid themself a salary (or guaranteed payment) less than a reasonable amount to receive a higher QBI deduction, the taxpayer must reduce QBI by the amount of the less-than-reasonable salary payment.

    NOTE: There are more reductions than those listed in the bullets above, but these are the big-picture items likely to affect most taxpayers.

Qualified business income deduction loss carryover

If the net QBI for the year from all entities is a negative, then QBI is treated as a Qualified Business Loss (QBL). A QBL is carried forward to the following year; it cannot be carried back.

A QBL is treated as a separate trade or business for the purpose of calculating combined QBID (described in step 3) in the following tax year, which reduces the amount of QBI allowed to be deducted. A positive cumulative QBI is required to be eligible for the QBID in order to prevent unjust enrichment.

Additionally, note that W-2 wages and unadjusted basis immediately after acquisition do not carry over to future years; only the QBL carries over.

Step 2 – Reduce the qualified business income deduction for each pass-through entity based on limits

The qualified business income deduction is limited to 20% of qualified business income.

In other words, at best, a taxpayer will be able to ultimately deduct 20% of QBI. Depending on the taxpayer’s taxable income, the QBID may be further reduced below 20% of QBI.

A taxpayer’s taxable income is divided into three categories: a lower threshold, an upper threshold, and a phase-in range (the range between the two thresholds, i.e., the phase-in of the W-2 wage limit).

  • Lower threshold (≤ $160,700 Single or ≤ $321,400 Married Filing Jointly)
  • Phase-in range
  • Upper threshold (≥ $210,700 Single or ≥ $421,400 Married Filing Jointly)

If the taxpayer is above the lower threshold, the taxpayer’s QBID for each entity begins to be limited. In this case the allowed QBID from each entity is limited by the amount of the entity’s W-2 wages or a combination of W-2 wages and unadjusted basis of assets.

Within the phase-out range, qualifying businesses are partially limited by the W-2 wage limit, while SSTBs are limited first to a total phase-out range and then by the W-2 wage limit.

If the taxpayer is in the upper threshold, there is no Qualified Business Income Deduction deduction allowed for income from SSTBs.

The chart below goes into more depth.

Step 3 – Combining all qualified business income deductions

After determining the QBID allowed for each specific company, all of the individual QBIDs are added together.

Combined QBI Process
Entity Step 1
Determine QBI
 Step 2
Calculate QBID Allowed
Entity 1QBIAllowed QBID for Entity 1
Entity 2QBIAllowed QBID for Entity 2
Entity 3, 4, and 5QBIAllowed QBID for Entity 3, 4, and 5
Entity 6QBIAllowed QBID for Entity 6
  Step 3
Sum Allowed QBIDs
Combined QBID Total

Step 4 – Apply overall limitation

After combining the allowed QBIDs, there is one final limitation that determines the amount an individual taxpayer can deduct on line 10 of Form 1040 (i.e., QBID). The amount that can be deducted is the lesser of the following:

  • Combined Qualified Business Income Deduction
  • 20% × (Taxable income − Net capital gains)

Therefore, if a taxpayer has net capital gains, those gains may decrease his or her QBID. For this deduction, net capital gains are long-term gains and qualified dividends minus short-term losses.

(Combined QBI)

Assume QBI is provided by entity.

EntityStep 1
Step 2
Allowed QBID per Entity
Entity 1$100,000$20,000
Entity 2$200,000$30,000
Entity 3, 4,
and 5
Entity 6$100,000$10,000
Step 3
Combined QBID Total

(Overall Limitation)

A single taxpayer had net capital gains of $15,000 in the tax year.

Step 4Scenario AScenario BScenario C
Taxpayer’s taxable income$145,000$175,000$900,000
Assumed combined QBID$135,000$135,000$135,000
20% ×
(Taxable income − Net captial gains)
QBID equals lesser of$26,000$32,000$135,000

Qualified business income deduction examples

Now that you have an understanding of how to calculate the QBID, we’ll be going through a few examples where we make the steps more concrete.

Example: Applying the QBID for taxpayers under the phase-in threshold

James and Mary are each 25% partners in JMS Partnership, a domestic partnership, and have joint taxable income before the QBI deduction of $200,000, which includes $50,000 of capital gains. JMS had income of $91,000 for 2019, which includes $7,000 of capital gains and $4,000 of dividends.

Step 1 – Calculate qualified business income

Assuming that James and Mary are married and file a joint return, they will receive a distributive share of 50% of total partnership income. Their qualifying business income will equal 50% of total partnership income reduced by applicable non-business income, such as capital gains and dividends received. James and Mary’s qualifying business income is calculated as follows:

Calculate QBI
Distributive share of partnership income ($91,000 × 50%)$45,500
Less: Distributive share of capital gains ($7,000 × 50%)($3,500)
Less: Distributive share of dividend income ($4,000 × 50%)($2,000)
Qualifying business income$40,000

Step 2 – Calculate the qualified business income deduction allowed per entity

James and Mary have taxable income of $200,000, which is below the phase-in threshold of $321,400 for married filing jointly. Therefore, James and Mary will be able to deduct the full 20% of their partnership income, subject to the taxable income limitation. James and Mary’s QBID allowed for JMS will be:

Calculate QBID
Qualifying business income$40,000
Times: QBI deduction percentage× 20%
QBID allowed for JMS$8,000

When outside of the phase-in threshold, it is irrelevant whether a pass-through entity is a qualifying business of a specified service trade or business (SSTB). The deduction remains the same in either case.

Step 3 – Combine all of the qualified business income deductions

James and Mary are only members of one pass-through entity, and therefore the “combined” QBID will be $8,000.

Step 4 – Apply overall limitation

After the calculation of all deductions allowed, the QBID is compared to the taxable income of the joint taxpayers.

Apply Overall Limitation
Lower of:
Combined QBID$8,000
(Taxable income – Capital gains) × 20%$30,000

The combined QBID allowed is less than the overall limitation, so it will not be reduced. James and Mary will be able to claim an $8,000 qualified business income deduction.

Example: Special Service Trade or Business Limitation Phase-in

Earl, a single taxpayer, has taxable income of $195,700. Thus, he is subject to the specified service business limitation and the wages and property limitation. Earl has $100,000 of business income that would be QBI but for the fact it was generated by a specified service business. However, because Earl’s taxable income is in the phase-in range, he will be eligible for a partial QBID. Assuming Earl is not also limited by the wages and property limitation, his partial deduction would be computed as follows:

($195,700 – $160,700) ÷ $50,000= 70% reduction ratio
(1 – 70%) × $100,000= $30,000 of QBI
$30,000 × 20%= $6,000 QBID

Example: Wage and Property Limitation Phase-in

Fran, a single taxpayer, has taxable income of $175,700. Thus, she is subject to the wages and property limitation. Fran has $100,000 of QBI (not from a specified service business). However, Fran only has allocable W-2 wages of $30,000 and no qualifying property. Because Fran’s taxable income is in the phase-in range, the wage and property limitation will be phased in. Fran’s deduction is computed as follows:

($175,700 – $160,700) ÷ $50,000= 30% reduction ratio

Thus, any wage and property limitation will be phased in by 30%. In other words, only 30% of any limitation computed will apply. Therefore, Fran’s tentative QBID is $20,000 ($100,000 × 20%). However, under the wage and property limitation, her deduction would be limited to $15,000, a limitation (decrease) of $5,000. However, because Fran is in the phase-in range, only 30% of this limitation will apply. Thus, Fran’s QBID is $18,500 [$20,000 – ($5,000 × 30%)].

Aggregation with the qualified business deduction

Aggregation allows a taxpayer to combine multiple businesses and treat them as one business for the purposes of calculating the qualified business income deduction for each respective pass-through entity.

Taxpayers may want to do this is if one business has a higher payroll than others and the they wish to spread or share the higher payroll of one business among other businesses with lower payrolls when calculating the QBID. This can effectively increase the QBID in some instances.

A business owner may own multiple businesses that are each separate legal entities. For example, a business owner may own multiple gas stations, each of which is a separate S corporation. The IRS will allow a business owner to aggregate these businesses when calculating the allowed QBID if the following three conditions are met:

  1. All aggregated businesses have the same tax year, excluding short years.
  2. The same person or group of persons owns 50% or more of each trade or business.
  3. The businesses to be aggregated satisfy two of the following three criteria:
    • Products and services of the businesses are the same or customarily offered together.
    • Facilities or significant centralized business elements such as HR, accounting, purchasing, IT, etc., are shared.
    • The businesses operate in coordination with or reliance upon one or more of the businesses in the aggregated group.

Other important considerations for electing to aggregate include:

  • Each individual owner may decide whether to aggregate. The decision need not apply to each entire group of businesses and their owners.
  • The election to aggregate is a one-time decision, so each subsequent year must be aggregated the same way once aggregation is elected.
  • Aggregation is not allowed for SSTBs.
  • In terms of meeting the 50% ownership threshold, families are able to aggregate based on their total ownership.
    • Families include spouses, children, grandchildren, and grandparents.

Example: Aggregation with the qualified business income deduction

Step 1 – Aggregation of qualifying businesses

Sam is a single taxpayer with income of $400,000. He is also a member/partner of three pass-through entities, and 100% of Sam’s distributive share of net income (NI) is qualifying business income:

Sam’s Pass-Through Entities
EntityDistributive Share of NIW-2 Wages PaidUnadjusted Basis of Assets
PBJ Foods, LLC$160,000$55,000$325,000
Jelly Supply, LLC$45,000$90,000$950,000
Sandwich Law, LLP$125,000$360,000$59,000


All three entities operate in coordination with or rely upon each of the other businesses in the aggregated group. All three entities also share facilities and centralized business elements (HR, accounting, etc.). Sam’s decisions for the QBI deduction are intended to minimize his tax liability.

Step 2 – Calculate the qualified business income deduction allowed per entity

Sam’s taxable income exceeds the upper threshold for the QBID, meaning that the QBID for qualifying businesses will be equal to the lesser of qualifying business income and the W-2 wage limit and that no deduction may be taken for specified service trades or businesses.

Sandwich Law, LLP, is a law firm and thus a specified service trade or business; therefore, no QBI deduction will be allowed for Sam’s earnings from Sandwich Law.

The allowed qualified business income deductions for PBJ Foods and Jelly Supply are summarized below:

Calculate QBID for Businesses
EntityQualified Business Income × 20%W-2 Wages LimitQBID Allowable
PBJ Foods, LLC$32,000$27,500$27,500
Jelly Supply, LLC$9,000$46,250$9,000
Total  $36,500


In the calculation of the W-2 wage limit for Jelly Supply, the sum of 25% of W-2 wages and 2.5% of the unadjusted basis of assets exceeded 50% of the W-2 wages of Jelly supply.

Noting the high payroll of Jelly Supply and that PBJ’s qualified business income deduction was limited, Sam chooses to aggregate PBJ and Jelly Supply. Sandwich Law may not be aggregated, as it is an SSTB. In aggregating the two businesses, their qualifying business income, W-2 wages, and unadjusted basis of assets will be combined:

Calculate Aggregate QBI
QBI: PBJ Foods, LLC$160,000
QBI: Jelly Supply, LLC $45,000
Aggregate QBI $205,000
Times: Applicable percentage× 20%
Allowable aggregate QBI$41,000


Calculate Aggregate W-2 Wages
W-2 Wages: PBJ Foods, LLC$55,000
W-2 Wages: Jelly Supply, LLC $90,000
Aggregate W-2 wages$145,000


Calculate Aggregate Unadjusted Basis of Assets
Unadjusted basis of assets: PBJ Foods, LLC$325,000
Unadjusted basis of assets: Jelly Supply, LLC $950,000
Aggregate unadjusted basis of assets$1,275,000


This data will allow us to determine the W-2 wage limit for the aggregated entities:

Calculate W-2 Wage Limit
Greater of:
50% of W-2 wages paid$72,500
25% of W-2 wages paid + 2.5% of the unadjusted basis of assets$68,125


When aggregating PBJ and Jelly Supply, the QBI deduction is subject to a new wage limit of $72,500. This amount exceeds the total aggregated qualified business income deduction of $41,000. Thus, the entirety of the $41,000 may be deducted, subject to the overall income limitation.

Step 3 – Combine all of the qualified business income deductions

As all entities with a QBI deduction have been aggregated, the total combined QBID is $41,000.

Step 4 – Apply overall limitation

After combining all of the allowed QBI deductions, we will subject the combined QBID total to the to the overall limitation.

Apply Overall Limitation
Lower of:
Combined QBID$41,000
(Taxable income − Capital gains) × 20%$80,000

The combined qualified business income deduction is less than the overall limitation, so the total QBID that Sam is allowed will be $41,000.

Garrett Gleim Author

Reviewed by Garrett Gleim

Garrett W. Gleim, CPA, CGMA, leads production of the CPA, CMA, CIA, and EA exam review systems at Gleim. He holds a Bachelor of Science in Economics with a concentration in Accounting from the Wharton School, University of Pennsylvania. He is a member of the American Institute of Certified Public Accountants (AICPA) and the Florida Institute of Certified Public Accountants (FICPA). Also an active supporter of the local business community, Garrett serves as an adviser to several startups. He is an avid pilot and is certified as a flight instructor and commercial pilot.