The second in our series on the qualified business income deduction, created by the Tax Cuts and Jobs Act (TCJA or the Act) as part of federal tax reform. To learn more about this deduction, check out our other posts in the series.


Income from pass-through entities and sole proprietorships is taxed on the owners’ tax returns and at the owners’ tax rates. The Tax Cuts and Jobs Act (the Act) reduced the maximum federal tax rate for these owners— individuals, estates and trusts — to a maximum rate of 37 percent, correspondingly reducing the tax due on their business income.

At the same time, the Act dramatically reduced taxes on C corporation income to a flat rate of 21 percent. This meant that the income of individuals and trusts could potentially be taxed at a much higher rate than the income of C corporations.

The difference in rate structures provided a rationale for creating a new tax deduction.

Under the Act, the owner of a qualified U.S. trade or business became eligible for a qualified business income deduction (or Section 199A deduction) of up to 20 percent of qualified business income — subject to various exceptions, limitations, phase-ins and phase-outs.

This deduction is available for federal income tax purposes only, including when calculating the regular taxable income and alternative minimum tax (AMT) taxable income. It does not reduce income when calculating employment/self-employment taxes or the net investment income tax.

The deduction went into effect on January 1, 2018 and currently extends only through 2025.

Who Qualifies for the Deduction?

The qualified business income deduction is limited to the owners of qualified U.S. trades and businesses —i.e., sole proprietorships and pass-through businesses.

These owners can be individuals —including sole proprietors, business partners, S corporation shareholders and LLC members — as well as estates and certain trusts. They can also include certain real estate owners.

The owners can be active in the business or passive.

What is a Qualified U.S. Trade or Business?

The short answer: a U.S. trade or business that is not a C corporation.

Under the Act, only sole proprietorships and pass-through entities qualify their owners for the deduction. Pass-through entities are partnerships, S corporations, and single- and multiple-member LLCs. The Act specifically excludes C corporations from the definition of a qualifying trade or business.

For purposes of the deduction, a trade or business is loosely defined as a for-profit or income-generating activity that is engaged in regularly and continuously. The final determination is based on facts and circumstances.

There is an exception to specifically include certain rental or licensing activity that doesn’t otherwise meet the trade or business test. The renting or licensing of tangible or intangible property to a related trade or business is treated as a trade or business as long as all are commonly controlled. To be commonly controlled, at least 50 percent of every business/activity must be owned by the same person or group of people, either directly or indirectly.

The upshot? If you own real estate that is rented or licensed to your business, assuming the real estate and the business are commonly controlled, the real estate activity is a trade or business with regard to the deduction.

More generally, it remains unclear which rental real estate activities qualify for the deduction, although existing case law related to qualification as a trade or business sheds some light. Triple net leased property — where the tenant or lessee agrees to pay all real estate taxes, building insurance and maintenance — may not qualify. However, properties that are more actively managed may qualify for the deduction, even if the owner is not a real estate professional.


The qualified business income deduction is an evolving and extremely complex area of the federal tax code. Although the IRS says you can rely on the information in the proposed regulations until final regulations are made available, there are still many unanswered questions. Consult with a tax advisor before making any business or financial decisions based on this deduction, including any change in business entity.


Want to know more about the qualified business (QBI) income deduction, Section 199A, or tax reform in general?

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