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17.1 Section 199A Overview: 20% Deduction & Qualified Trades or Businesses

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EA Part 2 — Businesses: Free Study Guide 2026 Exam

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1 Chapter 1: Exam Cycle & Preparation

1.1 Current Exam Cycle, Blueprint & Study Decisions

2 Chapter 2: Business Entity Choices & Classification

2.1 Business Structures & Liability: Sole Proprietorship, Partnership, LLC, and Corporation 2.2 Entity Classification & Check-the-Box Rules (Form 8832) 2.3 Classification Elections, Default Rules & the 60-Month Limitation 2.4 EINs, Entity Changes & Closing a Business

3 Chapter 3: Sole Proprietorships

3.1 Schedule C Gross Income & Allowable Business Expenses 3.2 Self-Employment Tax (Schedule SE) & Statutory Employees 3.3 Business Use of Home (Simplified vs. Actual Method)

4 Chapter 4: Partnership Formation & Basis

4.1 Formation & Property Contributions under Section 721 4.2 Partner Liabilities under Section 752 (Recourse vs. Nonrecourse) 4.3 Partnership Tax Year, Accounting Periods & Form 1065 Filing 4.4 Family Partnerships, Gifted Interests & Income Allocations

5 Chapter 5: Partnership Basis & Loss Limitations

5.1 Outside Basis Calculations & Ordering Rules 5.2 Basis, At-Risk (§465) & Passive Loss (§469) Limitations 5.3 Excess Business Losses (§461(l)) & Related-Party Transactions (§707) 5.4 Debt Discharge: Partnership vs. S Corporation

6 Chapter 6: Partnership Operations & Distributions

6.1 Form 1065, Schedule K & Schedule K-1 Separately Stated Items 6.2 Guaranteed Payments vs. Distributive Shares 6.3 Nonliquidating & Liquidating Distributions & Section 751 Hot Assets 6.4 Centralized Partnership Audits, Notices & Opting Out

7 Chapter 7: Partnership Dispositions & Basis Adjustments

7.1 Sale or Exchange of a Partnership Interest 7.2 Optional Basis Adjustments (Section 754, 743(b) & 734(b)) 7.3 Partnership Terminations, Mergers & Divisions

8 Chapter 8: C Corporation Formation & Structure

8.1 Corporate Formation & Section 351 Transfer Requirements 8.2 Boot, Section 357 Liabilities in Excess of Basis & Section 1244 Stock 8.3 Capital Structure: Debt vs. Equity & Section 385 Principles 8.4 Controlled Groups & Closely Held Corporations

9 Chapter 9: C Corporation Operations & E&P

9.1 Form 1120 Gross Income, Corporate Deductions & 21% Flat Tax Rate 9.2 Book-Tax Differences (Schedule M-1 vs. Schedule M-3) 9.3 Current vs. Accumulated Earnings & Profits (E&P) 9.4 Accumulated Earnings & Personal Holding Company Taxes 9.5 Corporate Minimum Tax & Foreign Tax Credits

10 Chapter 10: C Corporation Distributions & Liquidations

10.1 Property Distributions, Dividends & Constructive Distributions 10.2 Stock Redemptions (§302) & Corporate Liquidations (§331/§336)

11 Chapter 11: S Corporation Eligibility & Operations

11.1 S Corporation Requirements & Form 2553 Election Rules 11.2 Election Deadlines, Late Election Relief (Rev. Proc. 2013-30) 11.3 Form 1120-S Operations, Reasonable Compensation & 2% Shareholder Fringes

12 Chapter 12: S Corporation Basis, Distributions & Taxes

12.1 Stock & Debt Basis Calculations, Ordering Rules & Form 7203 12.2 S Corp Distributions, Accumulated Adjustments Account (AAA) & E&P Tiers 12.3 Entity-Level Taxes (BIG §1374 & Passive Income §1375) & Termination

13 Chapter 13: Accounting Periods & Methods

13.1 Tax Years: Calendar, Fiscal, and 52-53 Week Years 13.2 Cash vs. Accrual Method & Section 448 Gross Receipts Test 13.3 Changes in Accounting Method (Form 3115) & Section 481(a) Adjustments 13.4 2025 Domestic Research Expensing & Foreign Research

14 Chapter 14: Business Gross Income & Inventory

14.1 Gross Receipts & Inclusions in Business Gross Income 14.2 Cost of Goods Sold (COGS) & Inventory Valuation (Cost, LCM, FIFO, LIFO) 14.3 Section 263A Uniform Capitalization (UNICAP) & Small Business Exemption

15 Chapter 15: General Business Deductions & Limits

15.1 Ordinary & Necessary Business Expenses (§162) & Disallowances 15.2 Business Meals, Gifts & Travel 15.3 Vehicle Expenses, Mileage & Substantiation 15.4 Business Interest Expense Limitation (§163(j)) & Business Taxes

16 Chapter 16: Business Losses & Net Operating Losses

16.1 Net Operating Losses (NOLs) 80% Taxable Income Cap & Carryforward Rules 16.2 Business Casualty, Theft & Disaster Losses 16.3 Business vs. Nonbusiness Bad Debts (Direct Write-Off Method §166)

17 Chapter 17: Section 199A Qualified Business Income Deduction

17.1 Section 199A Overview: 20% Deduction & Qualified Trades or Businesses 17.2 Specified Service Trades or Businesses (SSTBs) & Threshold Phase-Outs 17.3 W-2 Wage & UBIA Limitations Calculation & Aggregation Rules

18 Chapter 18: Depreciation Principles & MACRS

18.1 Depreciable Property, Cost Basis & Capitalization vs. Repair Regulations 18.2 MACRS Property Classes (3, 5, 7, 15, 27.5, 39-Year) & Depreciation Methods 18.3 Depreciation Conventions: Half-Year, Mid-Quarter (40% Rule) & Mid-Month

19 Chapter 19: Section 179 Expensing & Bonus Depreciation

19.1 Section 179 Expensing: $2.5M Limit, $4M Phase-Out & Taxable Income Limitation 19.2 2025 Bifurcated Bonus Depreciation: Pre-Jan 20 (40%) vs. Post-Jan 19 (100% OBBBA) 19.3 Listed Property Rules, >50% Business Use & Section 280F Luxury Auto Limits

20 Chapter 20: Amortization & Intangible Assets

20.1 Section 197 Intangibles & 15-Year Straight-Line Amortization 20.2 Start-Up (§195) & Organizational (§248/§709) Expenditures: $5,000 Rule & 180-Month Amortization 20.3 Depletion: Cost Depletion vs. Percentage Depletion for Natural Resources

21 Chapter 21: Business Property Dispositions & Recapture

21.1 Sale of Business Property & Reporting on Form 4797 21.2 Section 1231 Netting Process & 5-Year Lookback Recapture Rule 21.3 Section 1245 (Full Personal Property Recapture) & Section 1250 / Unrecaptured §1250 Gain

22 Chapter 22: Like-Kind Exchanges & Involuntary Conversions

22.1 Section 1031 Like-Kind Exchanges (Real Property Only, 45-Day/180-Day Deadlines) 22.2 Boot Recognition & Basis Calculation for Replacement Property 22.3 Section 1033 Involuntary Conversions & Replacement Periods

23 Chapter 23: Business Tax Credits

23.1 General Business Credit (Form 3800), Net Income Tax Limit & Carryback/Carryforward 23.2 Key Business Tax Credits: Research Credit (§41), WOTC (§51), Small Employer Health (§45R)

24 Chapter 24: Worker Classification & Information Reporting

24.1 Employee vs. Independent Contractor: Common Law Control & Form SS-8 24.2 Section 530 Relief Requirements & Consequences of Misclassification 24.3 Information Returns: Form 1099-NEC vs. 1099-MISC, Form W-2/W-3 & Backup Withholding

25 Chapter 25: Employment Taxes & Compliance

25.1 Form 941 (Quarterly Payroll Tax Return) & Federal Income Tax / FICA Withholding 25.2 Federal Unemployment Tax (Form 940) & State Unemployment Credit 25.3 Payroll Tax Deposit Schedules (Monthly vs. Semi-Weekly, $100K Rule) & Trust Fund Penalty (§6672)

26 Chapter 26: Fiduciary Income Taxation (Trusts & Estates)

26.1 Principles of Fiduciary Income Taxation & Form 1041 Filing Requirements 26.2 Fiduciary Tax Years, Exemptions & Estimated Payments 26.3 Simple and Complex Trusts, Tiers & Distribution Timing 26.4 DNI Computation & Fiduciary Expense Allocation 26.5 Income Distribution Deduction & Schedule K-1 (Form 1041) Flow-Through 26.6 Foreign Trusts, Grantor Control & Abusive Schemes

27 Chapter 27: Tax-Exempt Organizations & Farm Taxation

27.1 Recognition of Tax Exemption (Form 1023/1024) & §501(c)(3) Standards 27.2 Maintaining Exemption, Political Activity & Excess Benefits 27.3 Form 990 Series Annual Returns & Unrelated Business Taxable Income (UBTI / Form 990-T) 27.4 Unrelated Business Income & Debt-Financed Property 27.5 Farm Income, Schedule F & Conservation Costs 27.6 Farm Income Averaging & Conservation Deductions 27.7 Farm Disaster Elections & Livestock Replacement 27.8 Farm Rentals, Estimated Tax & Farm Depreciation

28 Chapter 28: Business Records, Reporting & ACA

28.1 Financial Statements, Records & Owner Transactions 28.2 Filing Extensions, International Forms & Cash Reporting 28.3 ACA Employer Size, Coverage & Reporting

29 Chapter 29: Employer & Self-Employed Retirement Plans

29.1 Qualified Plans, 401(k) Limits & Nondiscrimination 29.2 SEPs, Self-Employed Contributions & Owner Compensation 29.3 SIMPLE IRAs & Small-Employer Contribution Choices 29.4 Plan Reporting, Loans & Prohibited Transactions

30 Chapter 30: Rental Property & Passive Activities

30.1 Rental Income, Expenses & Conversion Basis 30.2 Rental Losses, Active Participation & Real Estate Professionals 30.3 Vacation Homes, Personal Days & Rental Allocations

17.1 Section 199A Overview: 20% Deduction & Qualified Trades or Businesses

Key Takeaways Explain This Topic AI

IRC §199A provides eligible noncorporate taxpayers—individuals, trusts, and estates—with a deduction of up to 20% of Qualified Business Income (QBI) from pass-through entities, made permanent by the One Big Beautiful Bill Act (OBBBA) of 2025.

The Section 199A deduction is taken 'below the line' from Adjusted Gross Income (AGI) to reduce taxable income; it is available to both standard deduction and itemized deduction filers, but it does NOT reduce self-employment tax on Schedule SE or the Net Investment Income Tax (NIIT).

Qualified Business Income (QBI) represents the net amount of qualified items of income, gain, deduction, and loss effectively connected with a US trade or business under IRC §162, but statutorily excludes capital gains/losses, dividends, non-business interest, S corporation shareholder reasonable compensation (§199A(c)(4)(A)), and partner guaranteed payments (§199A(c)(4)(B)).

Qualified REIT dividends and publicly traded partnership (PTP) income qualify for a separate 20% deduction component that is not restricted by the W-2 wage or UBIA depreciable property limitations.

When a taxpayer operates multiple qualified businesses, net operating losses from one entity offset net income from other entities; if aggregate QBI across all entities is negative, the entire net loss carries forward to the following tax year as a separate qualified business loss.

Last updated: October 2026

Statutory Architecture & Legislative Permanency (IRC §199A)

Congress enacted IRC §199A as part of the Tax Cuts and Jobs Act (TCJA) to establish economic parity between C corporations—whose statutory corporate income tax rate was slashed to a flat 21% under IRC §11—and pass-through business entities taxed at individual progressive rates reaching up to 37%. While the original TCJA pass-through provisions were scheduled to sunset after December 31, 2025, the One Big Beautiful Bill Act (OBBBA) , signed into law on July 4, 2025 , made the Section 199A Qualified Business Income Deduction PERMANENT for Tax Year 2025 and all subsequent tax years.

On the Special Enrollment Examination (SEE) Part 2, enrolled agent candidates must master the statutory mechanics of IRC §199A, including who is eligible, how the deduction is calculated, what items enter Qualified Business Income (QBI), and how multi-entity netting rules operate.

Eligible Noncorporate Taxpayers

The Section 199A deduction is strictly restricted to noncorporate taxpayers . Eligible entities include:

Individuals operating sole proprietorships (Schedule C or Schedule F);

Partners in general partnerships, limited partnerships, and limited liability companies (LLCs) taxed as partnerships (Form 1065 / Schedule K-1);

Shareholders in S corporations (Form 1120-S / Schedule K-1);

Estates and Trusts holding pass-through business interests.

[!CRITICAL] C corporations are statutorily barred from IRC §199A. A C corporation pays tax at the 21% entity level and can never claim a Section 199A deduction. Similarly, an individual shareholder receiving a dividend distribution from a C corporation cannot treat that dividend as QBI.

The "Below-the-Line" Deduction Mechanics

The Section 199A deduction occupies a unique statutory position in the federal individual income tax computation on Form 1040: Gross Income

  • LESS: Above-the-Line Deductions (Schedule 1, Part II: Half SE Tax, SEP/SIMPLE, SEHI)
  • EQUALS: Adjusted Gross Income (AGI) [Form 1040, Line 11]
  • LESS: Standard Deduction OR Itemized Deductions (Schedule A) [Line 12]
  • LESS: Section 199A Qualified Business Income Deduction [Line 13]
  • EQUALS: Taxable Income [Line 15]

Crucial Exam Distinctions:

Available to Both Standard and Itemized Filers: The QBI deduction is not an itemized deduction . A taxpayer claiming the standard deduction (e.g., $15,000 for single filers or $30,000 for MFJ in 2025) is fully entitled to deduct the Section 199A deduction on Line 13.

Zero Impact on Adjusted Gross Income (AGI): Because Section 199A is deducted after AGI is calculated, it does not alter AGI. Consequently, it has zero impact on AGI percentage floors, such as the 7.5% medical expense floor or charitable contribution percentage limitations.

Zero Impact on Self-Employment Tax (Schedule SE): Under IRC §199A(f)(1)(B), the QBI deduction does NOT reduce net earnings from self-employment. A sole proprietor or active partner must calculate and pay self-employment tax under Chapter 2 (IRC §1401) on their full net business earnings before taking the QBI deduction.

Zero Impact on Net Investment Income Tax (NIIT): The deduction does not reduce net investment income for purposes of the 3.8% NIIT under IRC §1411.

Comparative Table: QBI Deduction vs. Standard & Above-the-Line Deductions

Statutory Attribute Above-the-Line Deduction (IRC §62) Itemized Deduction (Schedule A / §63(d)) QBI Deduction (IRC §199A / §63(b)(3))

  • Reduces AGI? Yes (Form 1040, Line 11) No (Subtracted from AGI) No (Subtracted from AGI)
  • Available with Standard Deduction? Yes No (Alternative to Standard) Yes (Claimed alongside Standard)
  • Reduces Self-Employment Tax? Varies (e.g., SE health insurance does not) No No (IRC §199A(f)(1)(B))

Reporting Location on Form 1040 Schedule 1, Part II → Line 10 Line 12 (Schedule A) Line 13 (Form 8995 or 8995-A)

  • Eligible Taxpayers Individuals Individuals Noncorporate taxpayers only
  • Defining Qualified Trades or Businesses (IRC §162 Standard)

Under IRC §199A(d)(1) , a qualified trade or business is defined as any trade or business other than a Specified Service Trade or Business (SSTB) or the trade or business of performing services as an employee. To qualify, the activity must satisfy the trade or business standard under IRC §162 :

The Groetzinger Doctrine: Under Commissioner v. Groetzinger , 480 U.S. 23 (1987), an activity qualifies as a §162 trade or business if it is conducted with continuity, regularity, and a primary purpose of earning a livelihood or profit.

Real Estate Safe Harbor (Rev. Proc. 2019-38): A rental real estate enterprise qualifies as a §162 trade or business for Section 199A if it satisfies the IRS safe harbor: (1) maintaining separate books and records, (2) performing 250 or more hours of rental services per year (including maintenance, tenant screening, lease execution, and rent collection, performed by owners or hired contractors), and (3) maintaining contemporaneous service logs. Commercial triple-net leases and personal-use residences do not qualify under the safe harbor.

US Nexus Requirement (IRC §199A(c)(3)(A)(i)): All qualified items of income, gain, deduction, and loss must be effectively connected with the conduct of a trade or business within the United States (including Puerto Rico if effectively connected gross income is subject to tax under §1).

Defining Qualified Business Income (QBI) & Mandatory Statutory Exclusions

Qualified Business Income (QBI) is defined under IRC §199A(c)(1) as the net amount of qualified items of income, gain, deduction, and loss with respect to any qualified trade or business. However, Congress enacted explicit statutory firewalls that exclude specific revenue streams and expense items from QBI.

Items Statutorily EXCLUDED from QBI:

Capital Gains and Losses (IRC §199A(c)(3)(B)(i)): Net short-term capital gains/losses, net long-term capital gains/losses, and Section 1231 gains/losses treated as capital gains are excluded from QBI.

Dividends and Dividend Equivalents (IRC §199A(c)(3)(B)(ii)): Ordinary corporate dividends, qualified dividends, and dividend equivalents are excluded.

Non-Business Interest Income (IRC §199A(c)(3)(B)(iii)): Interest income earned on idle cash balances, investment accounts, or working capital reserves is excluded. Conversely, interest income on trade accounts receivable generated in the ordinary course of business is included in QBI.

Commodities and Foreign Currency Transactions (IRC §199A(c)(3)(B)(iv)-(v)): Gains or losses from commodities transactions, foreign currency exchange, and notional principal contracts are excluded.

Reasonable Compensation Paid to S Corporation Shareholder-Employees (IRC §199A(c)(4)(A)): W-2 wages paid to an S corporation shareholder-employee for services rendered are statutorily excluded from QBI. The wage expense reduces S corporation ordinary income, and the shareholder cannot treat their W-2 salary as QBI.

Guaranteed Payments Paid to Partners (IRC §199A(c)(4)(B)): Guaranteed payments for services rendered under IRC §707(c) paid to a partner are excluded from QBI. Similarly, Section 707(a) payments to a partner acting in a non-partner capacity are excluded.

Important

Mandatory Pass-Through Reductions: For self-employed individuals (sole proprietors and active partners), business deductions connected to the trade or business that are reported on Schedule 1 must reduce QBI. These include:

  • The deductible half of self-employment tax (IRC §164(f));
  • The self-employed health insurance deduction (IRC §162(l)); and

Deductible contributions to self-employed retirement plans (SEP-IRA, SIMPLE IRA, solo 401(k)) under IRC §404.

Summary Table: QBI Inclusion vs. Exclusion Matrix

  • Item of Income or Deduction Included in QBI? Statutory Authority & Rationale
  • Schedule C Gross Receipts less Ordinary Expenses YES IRC §199A(c)(1): Core §162 operational profit
  • Trade Accounts Receivable Interest YES Treas. Reg. §1.199A-3(b)(2)(ii)(C): Trade-related
  • Working Capital Bank Account Interest NO IRC §199A(c)(3)(B)(iii): Investment interest
  • Section 1245 Ordinary Depreciation Recapture YES Treas. Reg. §1.199A-3(b)(2)(ii)(A): Ordinary business gain
  • Section 1231 Capital Gain from Equipment Sale NO IRC §199A(c)(3)(B)(i): Capital asset gain
  • S Corp Reasonable Compensation (W-2 Wages) NO IRC §199A(c)(4)(A): Statutorily barred from QBI
  • Partnership Guaranteed Payments for Services (§707(c)) NO IRC §199A(c)(4)(B): Statutorily barred from QBI

Deductible 50% Self-Employment Tax (§164(f)) Reduces QBI Treas. Reg. §1.199A-3(b)(1)(vi): Attributable deduction

Self-Employed Health Insurance Deduction (§162(l)) Reduces QBI Treas. Reg. §1.199A-3(b)(1)(vi): Attributable deduction

Qualified REIT Dividends & Publicly Traded Partnership (PTP) Income

Under IRC §199A(b)(1)(B) , the Section 199A deduction includes a separate, distinct component: Total QBI Deduction = Combined QBI Component + 20 % × ( Qualified REIT Dividends + Qualified PTP Income ) \text{Total QBI Deduction} = \text{Combined QBI Component} + 20\% \times \Big(\text{Qualified REIT Dividends} + \text{Qualified PTP Income}\Big) Total QBI Deduction = Combined QBI Component + 20% × ( Qualified REIT Dividends + Qualified PTP Income )

Qualified REIT Dividends: Any dividend received from a Real Estate Investment Trust (REIT) that is not a capital gain dividend (under §857(b)(3)) and not a qualified dividend (under §1(h)(11)).

Qualified PTP Income: Net income from a Publicly Traded Partnership that is effectively connected with a US trade or business.

Note

Exemption from Wage and Property Limits: The 20% deduction for qualified REIT dividends and qualified PTP income is never subject to the W-2 wage or UBIA property limitations . Even the highest-income taxpayer whose trade or business QBI deduction is capped at $0 due to zero W-2 wages can still deduct the full 20% of their qualified REIT dividends.

Negative QBI Netting and Carryforward Rules (Treas. Reg. §1.199A-1(d))

When a taxpayer operates multiple pass-through entities, statutory netting rules prevent cherry-picking profitable businesses while ignoring loss businesses.

Current-Year Netting Rule

If a taxpayer has an overall positive QBI across all entities but incurs a net loss in one or more qualified businesses, the net loss from the unprofitable business must be allocated among the profitable businesses in proportion to their relative net QBI.

Loss Allocated to Business A = Net Loss × ( QBI of Business A Total Positive QBI of All Profitable Businesses ) \text{Loss Allocated to Business A} = \text{Net Loss} \times \left( \frac{\text{QBI of Business A}}{\text{Total Positive QBI of All Profitable Businesses}} \right) Loss Allocated to Business A = Net Loss × ( Total Positive QBI of All Profitable Businesses QBI of Business A ​ )

After netting, each profitable business's reduced QBI is tested against its own W-2 wage and UBIA limitations (if applicable). W-2 wages and UBIA from the loss business are completely ignored.

Qualified Business Net Loss Carryforward Rule

If the aggregate net QBI of all qualified trades or businesses combined is negative for the tax year:

The taxpayer's QBI deduction for the current year is $0 .

The net negative aggregate QBI carries forward to the immediately following tax year as a separate qualified business loss carryforward .

In Year 2, the loss carryforward is treated as a loss from a qualified trade or business, offsetting Year 2 positive QBI before calculating the Year 2 deduction.

The carryforward does not offset non-business income (such as W-2 wages or stock gains) in the loss year, nor does it convert into a Net Operating Loss (NOL) under IRC §172.

  • Comprehensive Worked Numerical Examples
  • Scenario 1: Sole Proprietor vs. S Corporation Shareholder QBI Computation

Facts: Brian operates a commercial marketing agency (a non-SSTB). In 2025, before any owner compensation or entity taxes, the agency generates $300,000 of net operating revenues. Brian's taxable income is $180,000 (below the statutory threshold). Compare Brian's QBI under two different entity structures:

Case A: Operated as a Sole Proprietorship (Schedule C):

  • Gross net operating income: $300,000
  • Less allocable deductions: Deductible half of SE tax ($11,500) and SE health insurance ($8,500) = $20,000
  • Brian's QBI: $300,000 - $20,000 = $280,000
  • Tentative QBI deduction: $280,000 × 20% = $56,000

Case B: Operated as an S Corporation (Form 1120-S):

S corporation pays Brian reasonable compensation of $100,000 reported on Form W-2.

S corporation net ordinary income on Form 1120-S, Box 1 (Schedule K-1): $300,000 - $100,000 (W-2 salary) = $200,000

Brian's QBI: Under IRC §199A(c)(4)(A), Brian's $100,000 W-2 salary is statutorily excluded from QBI. Brian's QBI is strictly the pass-through ordinary income of $200,000 .

Tentative QBI deduction: $200,000 × 20% = $40,000 (Exam takeaway: S corporation owner salaries reduce QBI dollar-for-dollar, resulting in a lower QBI deduction compared to an equivalent sole proprietorship).

Scenario 2: Multi-Entity Netting & Carryover Mechanics

Facts: In 2025, Claire, a single filer, owns three separate qualifying pass-through businesses (non-SSTBs):

  • Business Alpha (sole proprietorship): QBI = +$120,000
  • Business Beta (partnership interest): QBI = +$80,000
  • Business Gamma (single-member LLC): QBI = ($250,000) [operating loss]

Step-by-Step Calculation for 2025:

  • Aggregate Positive QBI: $120,000 (Alpha) + $80,000 (Beta) = $200,000
  • Aggregate Business Loss: ($250,000) (Gamma)

Compute Net Aggregate QBI:

Net QBI = $200,000 - $250,000 = -$50,000

Determine 2025 QBI Deduction: Because aggregate QBI is negative, Claire's allowable Section 199A deduction for 2025 is $0 .

Determine Carryforward to 2026: Under Treas. Reg. §1.199A-1(d)(2)(iii), the net negative QBI of ($50,000) carries forward to 2026 as a loss from a qualified trade or business.

Subsequent Year (2026) Utilization: In 2026, Business Alpha generates +$160,000 of QBI, and Businesses Beta and Gamma break even ($0 QBI).

Claire's 2026 tentative QBI before deduction: $160,000 - $50,000 (carryforward from 2025) = $110,000 .

Claire's 2026 QBI deduction: $110,000 × 20% = $22,000 (assuming no wage/UBIA limits).

Deductible tips and QBI

For 2025, exclude from QBI qualified tips to the extent the related §224 deduction is allowed under the applicable rules. Do not claim both a QBI component and the separate tips deduction on the same excluded amount. Ordinary W-2 compensation remains outside QBI; statutory-employee reporting has its specific exception. See the 2025 Form 8995 instructions .