Understanding the Business
Pass-Through Deduction
When Congress passed the Tax Cuts and Jobs Act (TCJA) in 2017, it was one of the most sweeping changes to the federal tax code since the mid-eighties. One of the legislation’s major benefits was a 20% deduction on qualified business income (QBI) for pass-through entities (also referred to as the 199A deduction). It had been scheduled to end on December 31, 2025. Under the provisions of the 2025 One Big Beautiful Bill Act, the 20% deduction has been permanently extended. And, beginning with taxable years beginning after December 31, 2025, there will be an additional inflation-adjusted minimum deduction of $400 for taxpayers with at least $1,000 of qualifying income from active qualified trades or businesses.
Taking advantage of this deduction has the potential to greatly reduce a business taxpayer’s marginal federal tax exposure.
Do you qualify as a Specified Service Trade or Business?
Pass-through entities are those in which business profits are taxed at an owner’s individual rate. Eligibility for the deduction depends on both the type of business and its taxable income. Many owners of sole proprietorships, partnerships, S corporations, LLCs, and some trusts and estates are eligible for the QBI deduction. Not all entities are treated the same regarding QBI. If a business is classified as a Specified Service Trade or Business (SSTB), the deduction may be limited, or may disappear once taxable income reaches a certain threshold. Income earned through a C corporation or by providing services as an employee is not eligible for the deduction.
An SSTB is considered to be any trade or business providing services in the fields of health; law; accounting; actuarial science; performing arts; consulting; athletics; financial services; brokerage services; investing and investment management; trading/dealing in securities, partnership interests, or commodities; or any trade or business where the principal asset is the reputation or skill of one or more of its owners or employees.
Non-SSTBs: It is important to note that even within the definition of a SSTB, there are exceptions. Many single-owner and self-employed businesses are NOT considered to be SSTBs. Those generally not falling into the SSTB designation are: rideshare services, sales, engineering, architecture, real estate and property management, contracting, landscaping, childcare and eldercare, grooming (even of pets), notary services, and restaurants and food trucks. The categorization of consulting businesses can be a bit complicated, because the segment is so broad. If you provide counsel or advice to clients to help them achieve goals and solve their problems, then your business would be a SSTB. But, if you do not provide professional advice, you would NOT be considered a SSTB – such as those in educational training, or even fitness training.
How does it work?
Every year the IRS sets thresholds and phase-in ranges for QBI, which are adjusted for inflation. For instance, for 2025 tax year returns, total taxable income will have to be under a threshold of $197,300 for single filers or $394,600 for joint filers in order to qualify for the full deduction. Phase-in ranges apply above these thresholds, which could limit, or eliminate the deduction.
QBI is defined as net domestic business taxable income. It disregards investment income, guaranteed compensation for a partner’s services to a partnership, payments for services rendered to the business, REIT or cooperative dividends, and income from publicly traded partnerships (PTPs). It is the net amount of qualified items of income, gain, deduction and loss from any qualified business, and generally this includes, but is not limited to, the deductible part of self-employment tax, self-employed health insurance, and deductions for contributions to qualified retirement plans (e.g. SEP, SIMPLE and qualified plan deductions). The deduction is limited to the lesser of the QBI component plus any REIT/publicly traded partnership (PTP) component or 20% of the taxpayer's taxable income minus the net capital gain. When an owner has multiple qualified businesses, the deduction is calculated for each, with the aggregate limited to 20% of overall taxable income.
For SSTBs, both the thresholds and phase-in ranges apply. The SSTB exception does not apply for taxpayers with taxable income at or below the threshold amount (they may take the 20% deduction) and is phased in for taxpayers with taxable income within the designated phase-in range above that threshold. For taxpayers with taxable income above the phase-in range, no deduction is permitted with respect to any SSTB. For 2025 returns, the phase-in range is between $197,300 and $247,300 for single filers and between $394,600 and $494,600 for joint filers.
For taxpayers with taxable income from non-SSTB entities which falls above the highest level of applicable phase-in range there are some limitations to the deduction. For 2025, those top levels are $247,300 for single filers and $494,600 for joint filers with total taxable income from qualified businesses (non-SSTB), REITs and PTPs. For taxable income above these levels, the QBI deduction is based on a formula. The GREATEST of 50% of W-2 wages is compared to 25% of those W-2 wages plus 2.5% of the acquisition cost of depreciable business property. The GREATER of this calculated number is compared to QBI. The SMALLER of these two numbers is the QBI deduction based on the formula.
The phased ranges will increase beginning with the 2026 tax year.
If you would like to discuss how the QBI can affect your returns, please reach out to us. Contact Maria Mosa, at mmosa@hvandpartners.com or 914-617-7620 ext. 118, and she will put you in touch with a partner to assist you.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Hart Vida & Partners recommends that you consult professional tax, legal and accounting advisors before engaging in any tax, legal and accounting action or transaction.
- Hart Vida & Partners
Westchester Office:
400 Columbus Avenue
Suite 100S
Valhalla, NY 10595
Fax: 914-666-2549