Section 199A: Qualified Business Income Deduction (QBID)

Calculating QBI in the Tax Cuts and Jobs Act (TCJA) Era


The following information is not intended to be written advice concerning one or more 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’s or entity’s particular circumstances. Although the information provided is intended to be timely and accurate, we cannot guarantee its accuracy on the date received or future dates. No individual or entity should act on such information without the advice of a professional and careful consideration of the particular circumstances.


Qualified Business Income Deduction (Section 199A)

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 (potentially as high as 37%) than C corporations. Congress reduced this burden by creating the Qualified Business Income Deduction (QBID).

The QBID is the last deduction before determining a taxpayer’s taxable income. It is based on determining 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’s or partnership’s qualified business income and wages and property (discussed below) will be reported to them on Schedule K-1.

QBI must also be income that is effectively connected with the conduct of a trade or business within the United States or Puerto Rico and income that is included in determining taxable income for the tax year. However, amounts paid to taxpayers for reasonable compensation (i.e., 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, 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.
  • Brokerage services 

Also, 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 that are 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.

Overall Limitation

The QBID on line 9 of page 2 of Form 1040 is limited due to an overall limitationThe overall limitation is the lesser of

  • 20% × Qualified business income or
  • 20% × (Taxable income ˗ Net capital gains).

Therefore, if a taxpayer has net capital gains, the taxpayer’s net capital gains may decrease his or her QBID. For this deduction, net capital gains are long-term gains and qualified dividends, minus short-term losses. Before a taxpayer can apply the overall limitation, (s)he has to determine the combined QBID before the taxable income limitation. Determining the QBID is a three-step process. After the three steps have been used to determine the QBID, the taxpayer must apply overall limitation, which becomes Step 4.

Calculating QBID

In the next section, we break the QBID calculation into a 4-step process. Conceptually, before introducing the 4 steps, 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 $157,000 or is married filed jointly and makes more than $315,000.
  • As the last step, taxpayers may need to further reduce their deduction by overall limitation (discussed above).

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

 How to Calculate QBI

To calculate the combined QBID and ultimately the QBID, the following must be completed:

Step 1–every pass-through entity must first determine its QBI. 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 is provided to the taxpayer. This step should be “easy” for the individual since the information is provided by the entity. In practice, many tax professionals will be completing both the pass-through entity’s tax forms and the individual’s tax forms.

The details of this process are described under Determining What Constitutes QBI.

Step 2–In general, the most a taxpayer will be able to deduct is 20% of the QBI. In Step 2, the allowed QBID for each pass-through entity can be reduced to less than 20% if the taxpayer’s taxable income is above a threshold. If the taxpayer is in the phase-in range (of W-2 wage limit) or upper threshold, the QBID for each respective pass-through entity may be reduced or limited. This reduction is the allowed amount of QBID for each respective pass-through entity. Single taxpayers reach the phase-in range once taxable income exceeds $157,500 and enter the upper threshold at $207,500. Married Filing Jointly taxpayers reach the phase-in threshold when taxable income exceeds $315,000 and enter the upper threshold at $415,000.

The details of this process are described under Qualified Business Income Deduction Allowed Per Entity.

Step 3–This step occurs if the taxpayer has more than one pass-through entity with QBI. A taxpayer determines the applicable combined QBID by adding together the allowed QBID amount for each respective entity to arrive at a total (or combined) QBID. If there is only one pass-through entity, then the QBID for the one entity is the QBID for Step 3.

The details of this process are described under Combined QBID Process.

Step 4–The final step is for the taxpayer to apply the overall limitation to total QBID to determine the correct amount to deduct. This amount is then reported on line 9 of Form 1040.

The details of this process are described under Overall Limitation.

Determining What Constitutes QBI or SSTB (Step 1)

To determine QBI:

  • Ensure the entity is a relevant pass-through entity (i.e., sole proprietor, S corporation, partnership, estate, or trust).
  • Determine whether the entity is directly owned by the taxpayer (e.g., 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).
  • Calculate the net amount of 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.
  • The last step is to further reduce net income by:
    • Capital gains and losses
    • Dividends
    • Nonoperating 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 himself or herself 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.

Notes on the information above:

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

Qualified Business Income Deduction Allowed per Entity (Step 2)

During this calculation of Step 2, QBID is limited to 20% of QBI. 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 beyond 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 (≤ $157,500 Single or ≤ $315,000 Married Filing Jointly)
  • Phase-in range
  • Upper threshold (≥ $207,500 Single or ≥ $415,000 Married Filing Jointly)

If the taxpayer is above the lower threshold, the taxpayer’s QBID for each entity begins to be limited. In the case of taxable income being higher than the lower threshold, the QBID allowed 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 QBID deduction allowed for income from SSTBs. The chart below goes into more depth and should be closely reviewed by candidates.

Click here to download a printable PDF

Aggregation Rules

Aggregation is a choice a taxpayer can make on their own. Aggregation allows a taxpayer to combine multiple businesses and treat them as one business for the purposes of “Step 2 – Calculating the QBID for each respective pass-through entity.” The reason a taxpayer may do this is if one business has a higher payroll than others and the taxpayer wishes 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 for the taxpayer 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:

  • All aggregated businesses have the same tax year, excluding short years, and
  • The same person or group of persons owns 50% or more of each trade or business and 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.

Each individual owner may decide whether to aggregate. The decision need not apply to each entire group of businesses and their owners. For example, Shareholder A could choose to aggregate the businesses on his return while Shareholder B may not.

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.

(Aggregation Rules)

Percentage of Ownership

Entity A

Entity B

Entity C









Total Ownership




Grandfather, Daughter, and Grandson can aggregate Entities A, B, and C.

Combined QBID Process (Step 3)

After determining the QBID allowed for each specific company, all of the individual QBIDs are combined (or summed) into one amount.


Combined QBI Process



Step 1
Determine QBI

Step 2


Step 3
Sum QBID Allowed

Entity 1


Calculate QBID Allowed

QBID Allowed

Entity 2


Calculate QBID Allowed

QBID Allowed

Entity 3, 4, and 5


Calculate QBID Allowed

QBID Allowed

Entity 6


Calculate QBID Allowed

QBID Allowed

Combined QBID Total

Sum of QBID Allowed

Overall Limitation Process (Step 4)

After combining all of the allowed QBIDs, there is one final limitation that determines the amount an individual taxpayer can deduct on line 9 of Form 1040 (i.e., QBID). Which is the lesser of the following:

  • Combined QBID*
  • 20% × (Taxable income ˗ Net capital gains)

*Depicted in the previous table as Sum of QBID Allowed

(Overall Limitation / Final Step)

A single taxpayer had net capital gains of $15,000 in the tax year. Assume QBI is provided by entity.

QBID Loss Carryover

If the net QBI (i.e. Step 1, here) for the year from all entities is a negative (before any Step 2 calculation), then QBI is treated as a Qualified Business Loss (QBL). A QBL amount is carried forward to the following year (loss cannot be carried back). Carried forward qualified business loss reduces the amount of qualified business income that is subject to the QBI deduction in future years. A cumulative qualified business income/profit is required to be eligible for the QBI deduction in order to prevent unjust enrichment.

  • The W-2 wages and unadjusted basis immediately after acquisition do not carry over to future years; only the QBL carries over.
  • QBL in the subsequent year can be visualized as an entity in the pool of QBI entities and allocated proportionately among that year’s QBID per entity.

Other Section 199A Rules

The Sec. 199A deduction does not affect the taxpayer’s basis (outside adjusted basis or shareholder’s AAA) 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 as neither 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. For the purposes of the CPA Exam, candidates could see a conceptual-level question in which qualified REIT dividend income is also a component of the QBID.

Garrett Gleim Author

This Article was 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.