Tax Strategy

Section 199A (QBI) Deduction: Your 20% Pass-Through Bonus

Maximize Your Qualified Business Income Deduction

The QBI deduction can save business owners up to 20% on pass-through income. Learn strategies to maximize this valuable deduction before it expires in 2025.

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20%

Maximum QBI Deduction

$383,900

Joint Filer Phase-Out Threshold (2024)

2025

Current Scheduled Expiration Year

50%

W-2 Wage-Based Deduction Limit

Quick Answer

Section 199A allows up to 20% deduction on qualified business income from pass-through entities - potentially saving $37K+ on $500K of QBI
Full deduction phases out at $383,900-$483,900 for joint filers (2024) - income management can preserve the benefit
SSTB businesses (health, law, accounting, consulting, financial services) lose the deduction entirely above income thresholds
Above thresholds, non-SSTB businesses are limited by W-2 wages paid - paying more in wages can increase the deduction
The QBI deduction is scheduled to expire after 2025 without congressional action - plan accordingly

The Opportunity

Why Section 199A Matters

Up to 20% Deduction on Qualified Business Income

Section 199A allows eligible business owners to deduct up to 20% of their qualified business income (QBI) from pass-through entities (S-Corps, partnerships, sole proprietorships). On $500K of QBI, this is a $100K deduction, saving up to $37K in federal taxes at the top bracket.

Income Limitations and Phase-Outs

The full 20% deduction phases out for high earners: $191,950-$241,950 for single filers, $383,900-$483,900 for joint filers (2024). Specified Service Trade or Business (SSTB) owners lose the deduction entirely above these thresholds. Strategic planning can preserve the deduction.

W-2 Wage and Property Limitations

Above the income thresholds, non-SSTB businesses face limitations based on W-2 wages paid and/or qualified property. The deduction is limited to the greater of: 50% of W-2 wages, OR 25% of W-2 wages plus 2.5% of qualified property basis. These limits encourage employment and investment.

SSTB Rules: Some Businesses Excluded

Specified Service Trade or Business (SSTB) includes health, law, accounting, consulting, financial services, and businesses where principal asset is employee reputation or skill. SSTB owners above income thresholds get no QBI deduction - but strategic structuring can sometimes separate non-SSTB activities.

Implementation

Proven Strategies

Income Management to Stay Below Thresholds

If you are near the income phase-out thresholds, aggressive retirement contributions, charitable giving, and income timing can preserve the QBI deduction. Maximizing 401(k), SEP, and defined benefit contributions reduces taxable income. Bunching charitable deductions in high-income years creates below-threshold opportunities.

Best for: Business owners near the income thresholds who can reduce taxable income through legitimate deductions.

Example:

Joint filers with $420K income ($36K above phase-out start). Max retirement contributions: $69K (Solo 401(k)) + $35K (spouse). Charitable giving: $30K. New taxable income: $286K - below $383,900 threshold. Full 20% QBI deduction restored = $80K deduction.

Optimize W-2 Wages for the Deduction

Above income thresholds, non-SSTB businesses can deduct up to 50% of W-2 wages paid. If your business pays low wages (owner-only or contractor-heavy), you may leave QBI deduction on the table. Hiring employees, converting contractors to employees, or paying yourself higher W-2 wages can increase the deduction.

Best for: Non-SSTB businesses above income thresholds that pay limited W-2 wages.

Example:

Business with $500K QBI, owner as only W-2 employee earning $100K. QBI deduction limited to 50% x $100K = $50K. Increase owner salary to $200K: Deduction = 50% x $200K = $100K (full 20% of QBI). Net benefit after payroll tax cost: $15K+ tax savings.

SSTB Separation Strategy

Some businesses combine SSTB and non-SSTB activities. Separating non-SSTB activities into a distinct entity may allow QBI deduction on the non-SSTB portion. A law firm's billing software division, or a medical practice's real estate, might qualify as separate non-SSTB businesses.

Best for: SSTB business owners with activities that could legitimately be separated into non-SSTB entities.

Example:

Medical practice owns building and provides management services to other practices. Separate real estate into property LLC, management into consulting LLC. Medical practice is SSTB (no QBI deduction above threshold). Real estate and management may qualify for QBI deduction as non-SSTB.

Avoid These Pitfalls

Common Mistakes

Ignoring the Deduction Entirely

Many business owners assume the QBI deduction is automatic or handled by their accountant without optimization. The deduction requires planning - income management, W-2 wage analysis, and entity structuring can significantly increase the benefit. Don't leave money on the table.

Failing to Plan for Income Spikes

A one-time income spike (business sale, large contract, bonus) can push you above thresholds and eliminate the QBI deduction for the year. Plan for income spikes with installment sales, deferred compensation, or accelerated deductions to spread income across tax years.

Aggressive SSTB Separation Without Substance

Separating SSTB activities without economic substance invites IRS challenge. The separated entity must have genuine business purpose, arm's-length pricing, and real operations. Paper separations purely for tax benefits will be collapsed under anti-abuse rules.

Questions

Common Questions

Here are the most common questions we receive about this topic.

Ask Your Question

QBI is generally the net income from a qualified trade or business operated as a sole proprietorship, partnership, S corporation, or LLC. It does not include W-2 wages, guaranteed payments, investment income, or income from C corporations. The 20% deduction applies only to QBI, not your total income.

SSTB includes: health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, and any business where the principal asset is employee reputation or skill. Engineering and architecture are specifically excluded from SSTB (they qualify for QBI deduction).

The deduction is the lesser of: (1) 20% of QBI, or (2) 20% of taxable income minus net capital gains. Above income thresholds, non-SSTB businesses face additional limits based on W-2 wages and qualified property. SSTB businesses above thresholds get no deduction. Software or a tax professional should calculate this.

Yes, within reason. Increasing your S-Corp salary or hiring employees increases W-2 wages, which increases the wage-based QBI deduction limit. However, higher W-2 wages also mean higher payroll taxes. Model the net benefit - sometimes increased wages help, sometimes they don't.

Section 199A is currently scheduled to expire after December 31, 2025. Without congressional action, the 20% QBI deduction will disappear starting in 2026. This creates urgency for planning and may influence decisions about income timing and business structure.

Ready to Maximize Your QBI Deduction?

The QBI deduction is complex but valuable. Let us help you develop a strategy to maximize this benefit before it potentially expires.

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