Section 199A QBI Deduction and Additional Below-the-Line Deductions

Qualified Business Income (QBI) Deduction Overview

• The Section 199A QBI deduction provides a deduction of up to $20\%$ of qualified business income (QBI) for eligible flow-through entities.
• The deduction is available to all taxpayers other than regular C corporations. This includes individuals, trusts, and estates.
• The deduction is taken "below the line," meaning it is deducted from Adjusted Gross Income (AGI).

Placement in the Tax Calculation Process

• Taxable income is arrived at through the following sequence:
  • Gross income
  • Minus Adjustments (to arrive at AGI)
  • Adjusted Gross Income (AGI)
  • Minus the Standard deduction OR Itemized deductions
  • Minus the Charitable contributions deduction (if the standard deduction is taken)
  • Minus the QBI deduction
  • Minus Additional deductions
  • Final Taxable income

Key Definitions and Components

• Qualified Business Income (QBI): This is ordinary business income less ordinary business deductions earned from a sole proprietorship, S corporation, LLC, or partnership connected to a business conducted within the United States.
  • QBI does specifically NOT include:
  • Wages earned as an employee.
  • Guaranteed payments to partners.
  • Dividends, interest, and capital gains or losses.
  • QBI for a business must be reduced by any adjustments taken to arrive at AGI that relate to that business, including self-employment (SE)-related deductions.
• Qualified Property: This is defined as any tangible, depreciable property that is:
  • Held by the business at the end of the year.
  • Used at any point during the year in the production of QBI.
• Qualified Trade or Business (QTB): Any business other than a Specified Service Trade or Business (SSTB).
• Specified Service Trade or Business (SSTB): A flow-through entity involving direct services in specific fields where the principal asset of the business is the reputation or skill of employees or owners. Fields include:
  • Health
  • Law
  • Accounting
  • Actuarial science
  • Performing arts
  • Consulting
  • Athletics
  • Financial services
  • Engineering and architectural services are specifically excluded from the definition of an SSTB.

Minimum QBI Deduction and Material Participation

• Aggregate QBI from active qualified trades or businesses must be at least $\$1,000$ (for the year 2026).
• An "active qualified trade/business" requires the taxpayer to materially participate.
• Material participation means the taxpayer is involved in the operations of the activity on a regular, continuous, and substantial basis.
• Taxpayers with active QBI are entitled to a minimum QBI deduction of $\$400$ (2026).
• The deduction for the year is the greater of:
  • 1. The amount calculated under the regular QBI deduction rules.
  • 2. $\$400$.

Section 199A QBI Deduction Limitations

• Limitations are based on two factors: the taxpayer's total taxable income before the QBI deduction and whether the entity is a QTB or an SSTB.
• W-2 Wage and Property Limitation: When applicable, the deduction is limited to the greater of:
  • 1. $50\%$ of W-2 wages for the business.
  • 2. $25\%$ of W-2 wages for the business plus $2.5\%$ of the unadjusted basis immediately after acquisition (UBIA) of all qualified property.
  • Note: This specific limitation does not apply to Real Estate Investment Trust (REIT) or Publicly Traded Partnership (PTP) income.
• Overall Taxable Income Limitation: The total Section 199A QBI deduction is the lesser of:
  • 1. Combined QBI deductions for all qualifying businesses.
  • 2. $20\%$ of the taxpayer's taxable income (before the QBI deduction) in excess of net capital gain.
• Net Capital Gain Definition: Includes the excess of net long-term capital gain (LTCG) over net short-term capital loss (STCL) and qualified dividend income.

Taxpayer Categories Based on Income Thresholds (2026)

Category 1: Taxable Income Below the Threshold

• Thresholds: At or below $\$201,750$ (Single or Head of Household) or $\$403,500$ (Married Filing Jointly).
• Treatment: Neither restrictive SSTB rules nor W-2 wage and property limits apply. The taxpayer is eligible for the full $\text{QBI} \times 20\%$ deduction. SSTBs are treated exactly the same as QTBs.

Category 2: Taxable Income Above the Threshold

• Thresholds: Above $\$276,750$ (Single or Head of Household) or $\$553,500$ (Married Filing Jointly).
• QTB Treatment: The QBI deduction is allowed but may be limited by W-2 wage and property rules.
• SSTB Treatment: Zero deduction is allowed ($\$0$).

Category 3: Taxable Income Within the Phase-in Range

• Range: Between $\$201,750$ and $\$276,750$ (Single/HOH) or $\$403,500$ and $\$553,500$ (MFJ).
• Treatment: Calculation is very complex and involves phase-in rules.

Calculation Examples for Category 1 Taxpayers

Case A: QTB with Taxable Income Up to $\$201,750$

• Facts: Single filer, Taxable Income before QBI = $\$50,000$, Net Capital Gains = $\$5,000$, QBI = $\$40,000$.
• Step 1 (Tentative Deduction): \40,000 \times 20\% = \$8,000$.
• Step 2 (Overall Limit): (\$50,000 - \5,000) \times 20\% = \$9,000$.
• Step 3 (Result): Lesser of $\$8,000$ and $\$9,000$ is $\$8,000$.

Case B: SSTB with Taxable Income Up to $\$201,750$

• Facts: Single filer, Taxable Income before QBI = $\$50,000$, Net Capital Gains = $\$15,000$, QBI = $\$40,000$.
• Step 1 (Tentative Deduction): \40,000 \times 20\% = \$8,000$.
• Step 2 (Overall Limit): (\$50,000 - \15,000) \times 20\% = \$7,000$.
• Step 3 (Result): Lesser of $\$8,000$ and $\$7,000$ is $\$7,000$.

Calculation Examples for Category 2 Taxpayers

Case C: QTB with Taxable Income of $\$276,750$ or More

• Facts: Single filer, Taxable Income before QBI = $\$300,000$, Net Capital Gains = $\$0$, QBI = $\$100,000$, W-2 wages = $\$30,000$, UBIA = $\$80,000$.
• Step 1 (Tentative Deduction): \100,000 \times 20\% = \$20,000$.
• Step 2 (Wage/Property Limit): Greater of:
  • A: \30,000 \times 50\% = \$15,000$
  • B: (\30,000 \times 25\%) + (\$80,000 \times 2.5\%) = \$7,500 + \$2,000 = \$9,500$
  • Limit = $\$15,000$.
• Step 3 (Lesser of Step 1 & 2): $\$15,000$.
• Step 4 (Overall Limit): \300,000 \times 20\% = \$60,000$.
• Step 5 (Result): Lesser of Step 3 ($\$15,000$) and Step 4 ($\$60,000$) is $\$15,000$.

Case D: SSTB with Taxable Income of $\$276,750$ or More

• Facts: Single filer, Taxable income exceeds the threshold, and the business is an SSTB.
• Result: The taxpayer is not eligible for a QBI deduction. Deduction = $\$0$.

Additional Below-the-Line Deductions (2025–2028)

These deductions are claimed on Schedule 1-A and are available whether a taxpayer itemizes or takes the standard deduction.

No Tax on Tips

• Maximum Deduction: $\$25,000$ of qualified tips.
• Qualified Tips: Cash tips, charge card tips, and tip-sharing arrangements received in occupations that customarily receive tips.
• Phase-out: Threshold of $\$150,000$ (MAGI) for single; $\$300,000$ for MFJ.
  • Reduction: Allowable amount is reduced by $\$100$ for every $\$1,000$ that MAGI exceeds the threshold.
• Eligibility: Married taxpayers must file jointly. SSN must be included on the tax return.

No Tax on Overtime

• Maximum Deduction: $\$12,500$ ($\$25,000$ if MFJ).
• Qualified Overtime: Compensation in excess of the regular rate for hours worked over 40 in a workweek. Excludes qualified tips.
• Phase-out: Threshold of $\$150,000$ (MAGI) for single; $\$300,000$ for MFJ.
  • Reduction: Allowable amount is reduced by $\$100$ for every $\$1,000$ that MAGI exceeds the threshold.
• Eligibility: Married taxpayers must file jointly. SSN must be included on the tax return.

No Tax on Qualified Vehicle Loan Interest

• Maximum Deduction: $\$10,000$.
• Qualified Vehicle: Passenger vehicles (car, van, SUV, truck, motorcycle) with gross vehicle weight $< 14,000$ pounds. Original use must begin with the taxpayer, and final assembly must be in the United States. Loan must originate after 2024.
• Phase-out: Threshold of $\$100,000$ (MAGI) for single; $\$200,000$ for MFJ.
  • Reduction: Allowable amount is reduced by $\$200$ for every $\$1,000$ that MAGI exceeds the threshold.

Enhanced Deduction for Seniors

• Maximum Deduction: $\$6,000$ for taxpayers age 65 or older by year-end.
• Application: Taken in addition to the standard deduction or itemized deductions.
• Phase-out: Threshold of $\$75,000$ (MAGI) for single; $\$150,000$ for MFJ.
  • Reduction: Allowable amount is reduced by $6\%$ of the amount over the threshold.
• Eligibility: Married taxpayers must file jointly. SSN must be included on the tax return.