Section 199A Deductions – Pass Through Tax Breaks

By Jason Watson, CPA
Posted Friday, November 3, 2023

Section 199A deduction also known as the Qualified Business Income deduction arises from the Tax Cuts & Jobs Act of 2017. This is a significant tax break for small business owners but there are rules and limits of course.

Section 199, without the A, is the section covering Domestic Production Activities Deduction. Section 199A is seemingly modeled after this (or at least a portion was ripped off by legislators) since the mathematics and reporting is similar between Section 199A and Section 199.

Section 199A Qualified Business Income deduction is a deduction from gross income on Line 13 on Page 1 of your individual tax return (Form 1040) for the 2020 tax year. Please recall that it is a deduction on your tax return since there are personal limitations. Therefore, two owners of the same business might have different results.

Calculating the Qualified Business Income Deduction

The basic deduction is 20% of net qualified business income which is huge. If you make $200,000, the deduction is $40,000 times your marginal tax rate of 24% which equals $9,600 in your pocket. Who says Obamacare isn’t affordable now? Here is the exact code-

(2) DETERMINATION OF DEDUCTIBLE AMOUNT FOR EACH TRADE OR BUSINESS. The amount determined under this paragraph with respect to any qualified trade or business is the lesser of-

(A) 20 percent of the taxpayer’s qualified business income with respect to the qualified trade or business, or

(B) the greater of-

(i) 50 percent of the W-2 wages with respect to the qualified trade or business, or

(ii) the sum of 25 percent of the W-2 wages with respect to the qualified trade or business, plus 2.5 percent of the unadjusted basis immediately after acquisition of all qualified property.

This is just a primmer… or if you’ve read this book from the beginning then you already know this. For more crazy details refer to our two chapters dedicated to the Section 199A deduction.