As part of the 2017 Tax Cuts and Jobs Act, the Internal Revenue Service has proposed the introduction of a deduction for qualified pass through business owners under the 199A Deduction. This deduction will allow for qualified taxpayers to take a deduction of up to 20-percent on qualified business income. This deduction is effective January 1, 2018. The deduction will apply specifically to S Corporations, Partnerships, and Limited Liability Companies which are taxed as pass through entities. As such, this deduction will not be taken by the entity itself, but rather by the shareholders/partners.

The deduction is available to taxpayers whose 2018 taxable income falls below $315,000 for a joint return and $157,000 for a single filer. Taxpayers whose incomes are higher than the threshold amounts are subjected to limitations and exceptions determined by occupation and wage and capital limit.

How it will be calculated

The deduction is calculated for qualified taxpayers as the lesser of: 

  1. 20% of the taxpayer’s qualified business income, plus 20% of qualified REIT dividends and qualified PTP income, or 

  2. 20% of the taxpayer’s taxable income less net capital gains


As previously mentioned, thresholds exist which may limit the deduction. These limitations depend on whether the business is a specified service trade or business (SSTB). There are two SSTB exceptions which include:

  1. Trades or businesses which provide services in health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, investing and investment management, trading, dealing in certain assets or any trade or business where the principal asset is the reputation or skill of one or more of its employees, and

  2. Performing services as an employee

If a taxpayer’s taxable income is below the thresholds, the exception does not apply. 

The limitations mentioned above are phased in for joint filers with taxable income between $315,000 and $415,000 and single filers with taxable income between $157,500 and $207,000. These phase ins are limited based upon whether the business is an SSTB, amount of W-2 Wages paid by the business, and unadjusted basis of certain property used by the business. Below is an income table for SSTBs. 

For Businesses which do not fall in the Specified Service Trade or Business fields, different limitations apply. For businesses with incomes under the income limits, the full 20% deduction is available. If the taxable income falls within the phase in ranges ($315,000-$415,000 for married, $157,500-$207,500 for all others) they will be allowed a partial deduction with W-2 and depreciable asset limits phased in. If taxable income is above the phase in limits ($207,500-$415,000) then the 20% deduction is compared to the W-2 and depreciable asset limits.

When non SSTB income exceeds the phase in ranges, they will need to calculate the amount of W-2 wages paid during the tax year (including owners). They then compare the full 20% deduction to the greater of:

(a) 50% W-2 wages, and,

(b) 25% W-2 wages plus 2.5% unadjusted basis immediately after acquisition of all qualified property. This calculation is shown in example 2 below. 

Here is an income table for Non SSTBs


  1. Steve, an accountant who runs his own firm files as single and has a taxable income of $100,000 - all of which is income from his business. Because he is under the $157,500 limit for single filers, he will be allowed the full 20% deduction. (This would also be true if Steve’s business was not a Specified Service Trade or Business.)

  2.  John operates an online bookstore which earns $1 Million in net qualified business income. His business pays $85,000 in W-2 wages. Since John is above the income limits but operates as a non SSTB, his deduction is limited by comparing the 20% deduction to 50% of W-2 wages. The deduction will be the lesser of:

       $1,000,000 x 20% = $200,000, or, 

       $85,000 x 50% = $42,500

       In this scenario, John would be allowed to deduct $42,500, since that is the                   lower of the two calculations.

Other relevant information

  • As of the most current draft released by the IRS, the deduction will be reported on line 9 of Form 1040. This is subject to change, filers and preparers should be advised to wait until official forms are released.

  • Income earned through a C corporation is not eligible for this proposed deduction. 

More detailed information can be found on the Internal Revenue Service website. Direct links can be found as follows: 

199A FAQ:

Proposed Regulations:

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