Definition
Section 199A allows noncorporate owners of sole proprietorships, partnerships and S corporations to deduct up to 20 percent of qualified business income, limited to 20 percent of taxable income above net capital gain. Above income thresholds, wage and property limits and the specified service trade or business rules apply. Before the 2025 amendment, the deduction was scheduled to end after December 31, 2025. Public Law 119-21 removed that end date and added a minimum deduction of $400 for taxpayers with at least $1,000 of active qualified business income, for years beginning after 2025.
Why it matters in an audit or review
The deduction is claimed on the owner's return, not the entity's, so the entity's statements do not record it. Pass-through entities still report qualified business income information on each Schedule K-1, and compilation or review clients may ask about it. Section 172 computes the 80 percent NOL limit without regard to this deduction, so the two interact on the owner's return.
Example
Illustrative: an owner has $300,000 of qualified business income and $350,000 of taxable income before the deduction, with no net capital gain, below the wage limit thresholds. The deduction is the lesser of 20% x $300,000 = $60,000 and 20% x $350,000 = $70,000, which is $60,000.
Common mistakes
- Treating the deduction as an entity-level expense.
- Overlooking the wage and property limits above the thresholds.
Sources
- Internal Revenue Code section 199A, subsections (a) and (i): https://www.law.cornell.edu/uscode/text/26/199A
- Public Law 119-21 (2025)
- Treasury Regulations sections 1.199A-1 through 1.199A-6
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error