The Section 199A Deduction: One of the Most Valuable Benefits of Running a Pass-Through Business
- Lauren Knoll
- 4 days ago
- 2 min read
If you operate your business as a sole proprietor, a partnership, an S-Corporation, or an LLC taxed as any of those structures, there is a deduction available to you that the Tax Cuts and Jobs Act of 2017 created and that many small business owners either do not fully understand or are not maximizing. It is the Section 199A qualified business income (QBI) deduction, and at its best, it can reduce your taxable income from self-employment by up to 20%.
The Basic Concept
Section 199A allows qualifying business owners to deduct up to 20% of their qualified business income from their taxable income. Qualified business income is generally your net self-employment income from the business — revenue minus deductible business expenses. A business owner who nets $100,000 from their business might be able to reduce their taxable income by up to $20,000 through this deduction alone.
The Limitations That Matter
The deduction is subject to income thresholds, business type restrictions, and W-2 wage and capital limitations at higher income levels. Specified service trades or businesses, which include fields like law, health, consulting, financial services, and others, face phase-out rules that can reduce or eliminate the deduction above certain income thresholds. The rules are genuinely complex, and whether the full deduction is available to you depends on your specific income level, business type, and structure.
Why Structure and Planning Matter
Some business owners can increase the Section 199A deduction they qualify for through planning, such as adjusting W-2 wages paid through the business, making qualified property investments, or restructuring the business. Whether and how this applies to your situation is the kind of question that deserves a careful answer before year-end.
If you have never had a specific conversation with your CPA about Section 199A and whether you are maximizing it, September is an excellent time to have it. Contact us today.
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