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7.7 QBI Deduction (Section 199A)

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1 Part 1, Chapter 1: Tax Return Basics & Filing Requirements

1.1 Form 1040 Overview & Structure 1.2 Form 1040-SR for Seniors 1.3 Who Must File (Income Thresholds) 1.4 Filing Deadlines & Extensions (Form 4868) 1.5 Penalties: Failure to File vs. Failure to Pay 1.6 Sources of Tax Information (W-2s, 1099s, K-1s) 1.7 Preparer Due Diligence Requirements 1.8 Amended Returns (Form 1040-X)

2 Part 1, Chapter 2: Filing Status & Dependents

2.1 Single & Married Filing Jointly 2.2 Married Filing Separately 2.3 Head of Household Requirements 2.4 Qualifying Surviving Spouse 2.5 Qualifying Child Test (5 Tests) 2.6 Qualifying Relative Test (4 Tests) 2.7 SSN, ITIN & Residency Status

3 Part 1, Chapter 3: Wages & Employee Compensation

3.1 W-2 Income & Withholding 3.2 Employee vs. Independent Contractor 3.3 1099-NEC, 1099-MISC & 1099-K Reporting 3.4 Fringe Benefits (Taxable vs. Non-Taxable) 3.5 Stock Options (ISO vs. NQSO) 3.6 Special Categories (Clergy, Military, Foreign)

4 Part 1, Chapter 4: Interest, Dividends & Other Income

4.1 Taxable vs. Tax-Exempt Interest 4.2 US Savings Bonds & OID 4.3 Ordinary vs. Qualified Dividends 4.4 Schedule B Requirements 4.5 Rental & Royalty Income Basics 4.6 Alimony, Gambling & Other Income 4.7 Cancelled Debt & Form 1099-C 4.8 Net Operating Loss (NOL)

5 Part 1, Chapter 5: Capital Gains & Property Transactions

5.1 Capital vs. Non-Capital Assets 5.2 Cost Basis Calculation 5.3 Inherited & Gifted Property Basis 5.4 Short-Term vs. Long-Term Gains 5.5 Capital Gains Tax Rates (0%, 15%, 20%) 5.6 Netting & the $3,000 Loss Limit 5.7 Wash Sales & Related Party Rules 5.8 Sale of Primary Residence (Section 121) 5.9 Installment Sales (Form 6252) 5.10 Like-Kind Exchanges (Section 1031)

6 Part 1, Chapter 6: Adjustments to Income

6.1 Educator Expenses & HSA Contributions 6.2 Self-Employment Tax Deduction 6.3 IRA Contributions (Traditional) 6.4 Student Loan Interest Deduction 6.5 Alimony Paid (Pre-2019 Divorces) 6.6 Other Adjustments & New OBBBA Deductions (Tips, Overtime, Auto Loan, Senior Bonus)

7 Part 1, Chapter 7: Deductions (Standard & Itemized)

7.1 Standard Deduction by Filing Status 7.2 Medical & Dental Expenses (7.5% Floor) 7.3 State & Local Taxes (SALT $40K Cap) 7.4 Mortgage Interest Deduction 7.5 Charitable Contributions 7.6 Casualty & Theft Losses 7.7 QBI Deduction (Section 199A)

8 Part 1, Chapter 8: Tax Calculation & Credits

8.1 Tax Tables & Rate Schedules 8.2 Alternative Minimum Tax (AMT) 8.3 Self-Employment Tax Calculation 8.4 Child Tax Credit & Additional CTC 8.5 Earned Income Tax Credit (EITC) 8.6 Education Credits (AOC & LLC) 8.7 Child & Dependent Care Credit 8.8 Other Credits (Saver's, Premium Tax)

9 Part 1, Chapter 9: Retirement Accounts & Social Security

9.1 Traditional vs. Roth IRA 9.2 401(k), 403(b) & TSP Basics 9.3 SEP-IRA & SIMPLE IRA 9.4 Required Minimum Distributions (RMDs) 9.5 Early Withdrawal Penalties & Exceptions 9.6 Social Security Taxation

10 Part 1, Chapter 10: Specialized Individual Returns

10.1 Estate Tax (Form 706) 10.2 Gift Tax (Form 709) 10.3 Foreign Income (Form 2555) 10.4 FBAR & FATCA Reporting 10.5 Farm Income (Schedule F) 10.6 Disaster Area Rules

11 Part 2, Chapter 11: Business Entity Types

11.1 Overview of Entity Types 11.2 State Law vs. Tax Classification 11.3 Entity Selection: Reasonable Comp & QBI 11.4 Form 8832 & Rev. Proc. 2009-41 11.5 LLC Deep Dive: Spouses & EINs 11.6 Changing Status: The 60-Month Rule

12 Part 2, Chapter 12: Starting a Business

12.1 Hobby vs. Business (Profit Motive) 12.2 Employer Identification Number (EIN) 12.3 Tax Year Selection 12.4 Recordkeeping Requirements 12.5 Statute of Limitations 12.6 Related Party Transactions 12.7 Start-Up Costs, Entity Choice & OBBBA Business Changes (2025)

13 Part 2, Chapter 13: Worker Classification & Payroll

13.1 Employee vs. Independent Contractor 13.2 Common Law Test (Behavioral, Financial, Relationship) 13.3 Statutory Employees & Non-Employees 13.4 Form 941 & Payroll Deposits 13.5 Trust Fund Recovery Penalty 13.6 FUTA & Unemployment Taxes

14 Part 2, Chapter 14: Accounting Methods & Income

14.1 Cash vs. Accrual Method 14.2 Hybrid Methods & Changes 14.3 Inventory & COGS 14.4 Gross Receipts & Income Recognition 14.5 Constructive Receipt 14.6 Form 1099 Reporting Requirements 14.7 §163(j) Business Interest Expense Limitation 14.8 §174 Research & Experimental Expenditures

15 Part 2, Chapter 15: Depreciation & Asset Treatment

15.1 MACRS Basics & Recovery Periods 15.2 Mid-Month, Mid-Quarter, Half-Year Conventions 15.3 Section 179 Expense Deduction 15.4 Bonus Depreciation 15.5 Listed Property Rules 15.6 Amortization of Intangibles 15.7 Depletion 15.8 Disposition of Business Assets

16 Part 2, Chapter 16: Business Deductions

16.1 Ordinary & Necessary Test 16.2 Business Travel Expenses 16.3 Business Meals (50% Limitation) 16.4 Business Use of Vehicle 16.5 Home Office Deduction 16.6 Business Interest Limitation (163(j)) 16.7 Business Bad Debts

17 Part 2, Chapter 17: Business Credits & Fringe Benefits

17.1 General Business Credit Overview 17.2 R&D Credit & Disabled Access Credit 17.3 Small Employer Health Insurance Credit 17.4 Fringe Benefit Rules 17.5 Cafeteria Plans (Section 125) 17.6 Achievement Awards & Other Benefits

18 Part 2, Chapter 18: Sole Proprietorships

18.1 Schedule C Overview 18.2 Calculating Net Profit/Loss 18.3 Self-Employment Tax (Schedule SE) 18.4 Estimated Tax Payments 18.5 Hobby Loss Rules

19 Part 2, Chapter 19: Partnerships

19.1 Partnership Formation 19.2 Partner's Basis Calculation 19.3 Form 1065 Overview 19.4 Schedule K-1 (Partner's Share) 19.5 Guaranteed Payments 19.6 Partnership Distributions 19.7 At-Risk & Passive Activity Rules 19.8 Partnership Termination & Liquidation

20 Part 2, Chapter 20: C Corporations

20.1 Form 1120 Overview 20.2 Corporate Tax Rate (21%) & CAMT 20.3 Accumulated Earnings Tax 20.4 Dividends Received Deduction 20.5 Earnings & Profits (E&P) 20.6 Corporate Distributions, Dividends & Stock Redemptions 20.7 §351 Transfers, §1032, §1202 QSBS & Other Corporate Provisions 20.8 Corporate Liquidation

21 Part 2, Chapter 21: S Corporations

21.1 S Election Requirements (Form 2553) 21.2 Form 1120-S Overview 21.3 Shareholder Basis Calculation 21.4 Reasonable Compensation 21.5 S Corporation Distributions 21.6 Built-In Gains Tax & Termination

22 Part 2, Chapter 22: Specialized Business Returns

22.1 Trusts & Estates (Form 1041) 22.2 Simple vs. Complex Trusts 22.3 Distributable Net Income (DNI) 22.4 Tax-Exempt Organizations (Form 990) 22.5 Retirement Plans (Form 5500) 22.6 Qualified Retirement Plans Overview 22.7 Farm Taxation 22.8 Rental Real Estate Activities

23 Part 3, Chapter 23: Practice Before the IRS

23.1 What is Practice Before the IRS? 23.2 Who Can Practice (Full Rights) 23.3 Limited Practice Rights (AFSP, Unenrolled) 23.4 Special Relationships (Family, Employees) 23.5 PTIN Requirements 23.6 Circular 230 Overview 23.7 Office of Professional Responsibility (OPR)

24 Part 3, Chapter 24: Becoming & Maintaining EA Status

24.1 Two Paths to EA (Exam vs. IRS Experience) 24.2 Application Process (Form 23) 24.3 Background & Compliance Checks 24.4 Renewal Requirements (Form 8554) 24.5 Continuing Education Requirements 24.6 Inactive Status & Termination

25 Part 3, Chapter 25: Practitioner Duties (Circular 230)

25.1 Due Diligence Requirements 25.2 Knowledge of Client's Omission 25.3 Conflict of Interest Rules 25.4 Fee Requirements (Contingent, Unconscionable) 25.5 Advertising & Solicitation Rules 25.6 Tax Return Position Standards 25.7 Written Advice Standards 25.8 Sanctions & Penalties for Violations

26 Part 3, Chapter 26: Power of Attorney & Authorization

26.1 Form 2848 (Power of Attorney) 26.2 CAF (Centralized Authorization File) 26.3 Form 8821 (Tax Information Authorization) 26.4 Third-Party Designee 26.5 Signing Returns for Taxpayers 26.6 Client Confidentiality & Privilege 26.7 Representing Clients in Audits (Examination) 26.8 Appealing IRS Decisions 26.9 Collection Representation

27 Part 3, Chapter 27: Legal Authority & Research

27.1 Hierarchy of Tax Authority 27.2 Internal Revenue Code 27.3 Treasury Regulations 27.4 Revenue Rulings & Procedures 27.5 Court Cases & Precedent 27.6 Statutes of Limitations

28 Part 3, Chapter 28: Specific Representation Issues

28.1 Trust Fund Recovery Penalty (TFRP) 28.2 Innocent Spouse Relief (Form 8857) 28.3 Injured Spouse Allocation (Form 8379) 28.4 Penalty Abatement (FTA & Reasonable Cause) 28.5 Taxpayer Advocate Service (TAS) 28.6 Freedom of Information Act (FOIA)

29 Part 3, Chapter 29: Final Review & Exam Strategy

29.1 Exam Structure & Logistics (2026-2027) 29.2 The "Clock" of Representation (Master Deadlines) 29.3 Ethics vs. Law (Sanctions & Penalties) 29.4 Final Mock Review & Exam Strategy

30 Part 3, Chapter 30: Filing Process & E-File

30.1 E-File Requirements (The "More Than 10 Returns" Rule) 30.2 ERO Responsibilities 30.3 EFIN & Application Process 30.4 Form 8879 (Signature Authorization) 30.5 Record Retention & Data Security (WISP) 30.6 Preparer Penalties (Filing Specific)

7.7 QBI Deduction (Section 199A)

Key Takeaways Explain This Topic AI

OBBBA made the 20% QBI deduction PERMANENT — it no longer sunsets after 2025

2025 taxable income thresholds: Single $197,300 / MFJ $394,600 — below this, the W-2 wage/UBIA limitation and SSTB phase-out do not apply

Phase-in range for 2025 is $50,000 (Single) / $100,000 (MFJ); OBBBA expands the phase-in to $75,000 / $150,000 starting 2026

Specified Service Trades or Businesses (SSTBs) — health, law, accounting, consulting, athletics, financial services — face full phase-out once income exceeds upper threshold ($247,300 Single / $494,600 MFJ in 2025)

Total QBI deduction includes 20% of qualified REIT dividends and qualified PTP income, capped at 20% of taxable income minus net capital gains; OBBBA adds a $400 minimum deduction for taxpayers with at least $1,000 QBI starting 2026

Last updated: October 2026

The Qualified Business Income (QBI) deduction (Section 199A) is one of the most significant tax benefits available to pass-through business owners. The One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, made the QBI deduction PERMANENT — it no longer sunsets after 2025 as originally scheduled under TCJA.

What Is the QBI Deduction?

Section 199A allows eligible taxpayers to deduct up to 20% of qualified business income from domestic businesses operated as:

  • Sole proprietorships (Schedule C)
  • Partnerships (Form 1065, Schedule K-1)
  • S corporations (Form 1120-S, Schedule K-1)
  • Trusts and estates (Form 1041)

Important: The QBI deduction does NOT apply to:

  • Income from C corporations (taxed at the corporate level)
  • Employee wages (W-2 income)
  • Investment income (interest, dividends, capital gains)
  • Income earned outside the United States
  • Basic QBI Deduction Calculation

The basic formula is:

QBI Deduction = Lesser of:

  • 20% of Qualified Business Income , OR
  • 20% of Taxable Income (before the QBI deduction, minus net capital gains)

Example: A single taxpayer in 2025 has $80,000 QBI from a sole proprietorship and taxable income (pre-QBI) of $100,000 with no capital gains.

  • 20% of QBI = $80,000 × 20% = $16,000
  • 20% of Taxable Income = $100,000 × 20% = $20,000
  • QBI Deduction = lesser = $16,000
  • 2025 Income Thresholds

For 2025 the thresholds align with the top of the 24% bracket:

  • Filing Status Lower Threshold Upper Threshold Phase-in Range (2025)
  • Single / Other $197,300 $247,300 $50,000
  • Married Filing Jointly $394,600 $494,600 $100,000

Below the Lower Threshold: Simplified calculation — no W-2 wage / UBIA limitation, no SSTB restriction. Full 20% deduction regardless of business type.

Within the Phase-In Range: Limitations begin to apply proportionally.

Above the Upper Threshold: Full W-2 wage / UBIA limitation applies, and SSTBs are completely phased out.

Coming in 2026 (OBBBA): The phase-in range expands to $75,000 Single / $150,000 MFJ , smoothing the transition. The deduction itself is permanent and still 20%.

The W-2 Wage and Capital Limitation

For taxpayers with taxable income above the threshold , the QBI deduction is limited to the greater of:

  • Option A: 50% of the taxpayer's share of W-2 wages paid by the business
  • OR

Option B: 25% of W-2 wages PLUS 2.5% of the unadjusted basis immediately after acquisition (UBIA) of qualified property

What is UBIA? Original cost basis of tangible depreciable property used in the business, without reduction for depreciation, Section 179, or bonus depreciation. Property must be held and used in the business during the year and at year-end.

UBIA Recovery Period: Property qualifies until the later of:

  • 10 years after placed in service, OR
  • End of the last full year of the property's recovery period under §168

Example — W-2 Wage/UBIA Limitation (2025): A single taxpayer with 2025 taxable income of $300,000 (above the $247,300 upper threshold) has:

  • QBI of $200,000
  • W-2 wages paid: $60,000
  • UBIA of qualified property: $400,000

Limitation calculation:

  • Option A: 50% × $60,000 = $30,000
  • Option B: (25% × $60,000) + (2.5% × $400,000) = $15,000 + $10,000 = $25,000
  • Greater of A or B: $30,000
  • 20% of QBI: $200,000 × 20% = $40,000
  • QBI Deduction: Limited to $30,000
  • Specified Service Trades or Businesses (SSTBs)

SSTBs face the most restrictive rules.

SSTB Categories:

  • Category Examples
  • Health Physicians, dentists, nurses, veterinarians, therapists (NOT health clubs or pharmacies)
  • Law Attorneys, paralegals, legal arbitrators, mediators
  • Accounting CPAs, enrolled agents , tax preparers, auditors
  • Actuarial Science Actuaries
  • Performing Arts Actors, musicians, entertainers, directors
  • Consulting Professional advisors (NOT sales or training)
  • Athletics Athletes, coaches, team managers
  • Financial Services Wealth management, investment advisory, retirement planning
  • Brokerage Services Securities brokers (NOT real estate or insurance brokers)
  • Reputation/Skill Where the principal asset is the reputation or skill of employees

Important Exclusions: Engineers and architects are specifically excluded from SSTB classification and can claim the full QBI deduction regardless of income.

SSTB Phase-Out Rules for 2025:

  • Below $197,300 (single) / $394,600 (MFJ): Full QBI deduction available
  • $197,301 – $247,300 (single) / $394,601 – $494,600 (MFJ): Partial deduction (ratably reduced)
  • Above $247,300 (single) / $494,600 (MFJ): NO QBI deduction for SSTB income
  • REIT Dividends and PTP Income Component

The total Section 199A deduction has two components:

  • 1. QBI Component: 20% of QBI from qualified trades or businesses (subject to limitations above)
  • 2. REIT/PTP Component: 20% of qualified REIT dividends and qualified publicly traded partnership (PTP) income

Critical Rules for REIT/PTP Component:

  • NOT subject to W-2 wage / UBIA limitations
  • NOT subject to SSTB restrictions (except for PTP income from SSTB activities above threshold)
  • Qualified REIT dividends and qualified PTP income must be netted together before applying 20%
  • A combined REIT/PTP loss carries forward to offset future REIT/PTP income (not QBI)
  • REIT dividends reported on Form 1099-DIV, Box 5
  • Total QBI Deduction Formula: Total Deduction = QBI Component + REIT/PTP Component
  • (Capped at 20% of Taxable Income minus Net Capital Gains)
  • Multiple Business Aggregation

Taxpayers with multiple businesses may aggregate them if certain criteria are met:

  • Common ownership (50% or more)
  • Same tax year

Businesses share at least 2 of 3 factors: centralized purchasing, shared administrative services, or shared facilities/employees

Benefits: Combine QBI, W-2 wages, and UBIA across businesses for limitation calculations.

Netting: A business loss reduces QBI from profitable businesses. A negative total QBI carries forward to reduce future QBI.

Claiming the QBI Deduction

Reported on:

  • Form 8995 (Simplified) — for taxpayers below threshold amounts
  • Form 8995-A (Standard) — for taxpayers above thresholds, SSTBs, or multiple businesses

The deduction flows to Form 1040, Line 13 and reduces taxable income. It is a below-the-line deduction (after AGI) and does not affect AGI.

Looking Ahead — OBBBA Changes Effective 2026

OBBBA made several taxpayer-favorable changes effective starting 2026 (do not apply to 2025 returns):

Phase-in range expanded from $50K/$100K to $75K/$150K — gives a wider band for partial relief

$400 minimum QBI deduction for taxpayers with ≥$1,000 QBI — guarantees a small deduction even when wage/UBIA limits would otherwise eliminate the deduction

  • QBI deduction is permanent — no longer scheduled to sunset after 2025
  • EA Exam Tips

Key points:

  • 2025 thresholds: $197,300 / $247,300 (Single); $394,600 / $494,600 (MFJ)
  • QBI is PERMANENT under OBBBA — no 2025 sunset
  • Know the SSTB list — especially health, law, accounting, consulting, financial services
  • Engineers and architects are NOT SSTBs
  • Real estate and insurance brokers are NOT SSTBs
  • 20% of taxable income (minus net capital gains) is the overall cap
  • W-2 wage limitation: 50% of W-2 OR 25% W-2 + 2.5% UBIA (greater of)
  • REIT/PTP component is separate and not subject to W-2/UBIA limits
  • C corporation income and employee wages never qualify
  • 2026 OBBBA changes: wider phase-in ($75K/$150K) and $400 minimum deduction — do NOT apply to 2025 returns