The Section 199A deduction allows eligible pass-through business owners to deduct up to 20% of their qualified business income (QBI) from their federal taxable income. Most franchise owners, retail businesses, real estate operators, and other non-service businesses qualify. Attorneys, accountants, doctors, and certain other service professionals do not qualify once their income exceeds the threshold amounts. This deduction was created by the Tax Cuts and Jobs Act (TCJA) of 2017 and is currently scheduled to expire after December 31, 2025, unless Congress acts.

Tax law is complex and changes frequently. This post is informational and does not constitute tax or legal advice. Consult a qualified tax attorney or CPA before making business structure decisions based on this deduction.

What Counts as Qualified Business Income?

Qualified business income (QBI) is the net amount of ordinary income, gain, deduction, and loss from a qualified trade or business. To be QBI, the income must be effectively connected with a U.S. business and must not include certain investment items.

QBI does NOT include: wages earned as an employee, capital gains or losses, dividends, interest income (unless from the business itself), income from outside the United States, and reasonable compensation paid to yourself as an S-corporation owner. That last point matters: if you are an S-corp owner, the salary you take is excluded from QBI. The remaining profit that flows through as a distribution is what gets the 20% deduction.

Who Qualifies? Pass-Through Entities Explained

Section 199A applies to owners of pass-through entities, meaning businesses where the income passes through to the owner’s personal tax return rather than being taxed at the entity level. The qualifying entity types are:

• Sole proprietorships (Schedule C)
• Partnerships (including multi-member LLCs taxed as partnerships)
• S corporations
• Some trusts and estates
• Qualified real estate investment trusts (REITs) and publicly traded partnerships (PTP) income also counts

C corporations do not qualify for the Section 199A deduction. Their income is taxed at the corporate level at 21% under the TCJA rate, not passed through to owners.

What Are SSTBs and Why Are They Excluded?

A Specified Service Trade or Business (SSTB) is defined in IRC § 1202(e)(3)(A) by reference, and SSTBs are excluded from Section 199A once the owner’s income exceeds the threshold phase-in range. SSTBs include:

• Health (physicians, dentists, veterinarians)
• Law (attorneys, legal consultants)
• Accounting
• Actuarial science
• Performing arts
• Consulting
• Athletics (professional athletes and coaches)
• Financial services and brokerage
• Investment management
• Any business where the principal asset is the reputation or skill of one or more employees or owners

What Are the Income Thresholds and W-2 Wage Limitations?

Section 199A has two important limitations that kick in at higher income levels: the SSTB exclusion phase-in and the W-2 wage limitation.

Note: These figures are for 2024 and are adjusted annually for inflation. The 2026 thresholds may be higher. Check with your tax advisor for current figures.

Above the full limitation threshold, non-SSTB businesses face the W-2 wage limitation. The deduction cannot exceed the greater of:

• 50% of W-2 wages paid by the business, OR
• 25% of W-2 wages plus 2.5% of the unadjusted basis immediately after acquisition (UBIA) of all qualified property

This limitation matters most for high-income business owners whose businesses pay limited wages. Real estate operations often use the UBIA alternative to satisfy this test, since property values can be substantial even with minimal payroll.

Do Franchise Owners Qualify for Section 199A?

Yes. Most franchise businesses qualify for the full Section 199A deduction because they are not SSTBs. The deduction applies broadly to:

• Quick service and fast casual restaurant franchises
• Retail franchise businesses
• Home services franchises (cleaning, HVAC, pest control)
• Fitness and wellness franchises
• Senior care and childcare franchises
• Auto service and repair franchises

A $500,000 S-corp franchise business paying $200,000 in owner salary would have $300,000 in QBI. At 20%, the Section 199A deduction would be $60,000, reducing taxable income by that amount before applying the tax rate. For a 24% bracket taxpayer, that is $14,400 in saved federal taxes annually.

At Lopes Law LLC, we regularly work with franchise owners to ensure their entity structure and compensation planning maximizes this deduction before it potentially expires.

Planning Strategies Around Section 199A

S-Corporation Election. For sole proprietors and single-member LLCs earning above $100,000, an S-corp election can be powerful. You pay yourself a reasonable salary (which is excluded from QBI), then take the remaining profit as a distribution (which is included in QBI and gets the 20% deduction). This simultaneously reduces self-employment taxes and maximizes QBI.

Reasonable Compensation Planning. The IRS requires S-corp owners to pay themselves reasonable compensation. Setting this too high reduces your QBI and your 199A deduction. Setting it too low invites IRS scrutiny. An attorney with a tax background can help you find the right number.

Aggregation Rules. If you own multiple businesses, Treasury Regulation § 1.199A-4 allows you to aggregate them for purposes of calculating QBI, W-2 wages, and the UBIA of qualified property. This can help business owners meet the W-2 wage test by combining wage-heavy and wage-light operations.

UBIA of Qualified Property Alternative. For capital-intensive businesses with significant real property or equipment, the alternative W-2 plus UBIA calculation can allow a larger deduction even with lower payroll. This applies most often to manufacturing, real estate, and franchise businesses with significant equipment investments.

The 2025 TCJA Sunset: What You Need to Do Now

The Section 199A deduction is set to expire after December 31, 2025, as a sunset provision of the TCJA. As of 2026, Congress is debating whether to extend, make permanent, or allow the deduction to lapse.

The strategic implication is clear: do not assume this deduction will be available indefinitely, but also do not restructure your business reactively based on political uncertainty. Instead, plan for both scenarios. Ensure your current structure maximizes 199A while it exists. Use an entity structure that makes sense even without the deduction, so you are not forced into a costly restructuring if it disappears.

At Lopes Law LLC, our LL.M. in Taxation means we have structured hundreds of entities around this deduction and have modeled both the “sunset” and “extended” scenarios for our clients. See our flat-fee pricing for business entity review and tax planning services.

How Do Trusts Qualify for Section 199A?

Not all trusts can take the Section 199A deduction. The rules depend on the type of trust:

Grantor trusts are disregarded for income tax purposes. The income flows to the grantor (the person who created the trust) and is reported on the grantor’s individual return. The grantor can claim the 199A deduction if they otherwise qualify. Revocable living trusts are the most common grantor trusts, and franchise owners who hold franchise interests in a revocable trust can still benefit from 199A.

Non-grantor trusts and estates can claim the Section 199A deduction directly, subject to the same income limitations. The income thresholds for trusts are different from individuals: for a non-grantor trust, the W-2 wage limitation phase-in begins at $191,950 (2024 figure, unadjusted for trusts under certain circumstances). Estates and complex trusts pass QBI deductions through to beneficiaries under the trust’s distributable net income rules.

Electing Small Business Trusts (ESBTs) can hold S-corporation stock and can take the Section 199A deduction on their S-corp income. The deduction is calculated at the trust level and is not passed through to beneficiaries.

Section 199A and Real Estate: The Special Case

Real estate has a unique relationship with Section 199A. Rental income is not automatically QBI; the activity must rise to the level of a trade or business under IRC § 162 to qualify. The IRS provided a safe harbor in Revenue Procedure 2019-38: if you perform at least 250 hours of rental services per year (or meet other criteria), your rental activity is treated as a trade or business for 199A purposes.

Commercial real estate investors, landlords with multiple properties, and real estate fund operators are among the most significant beneficiaries of Section 199A when structured correctly. The UBIA alternative to the W-2 wage test also particularly benefits real estate investors, since high property values can satisfy the limitation even with minimal payroll.

For franchise owners who also hold the real estate their franchise operates on through a separate entity, Section 199A planning often involves both the operating franchise entity and the real estate holding entity, potentially with an aggregation election to maximize the combined deduction.

Sources: IRC § 199A; Treasury Regulation § 1.199A-1 through 1.199A-6; IRS Publication 535; Tax Cuts and Jobs Act of 2017 (Pub. L. 115-97). This post is informational and does not constitute tax or legal advice.