The fourth 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.

Updated March 2019 to reflect final regulations.


The amount of the qualified business income deduction (199A) is based on a highly complex calculation that depends on a number of factors, including the type of business and the owner’s income.

Basic Calculation

In general, the amount of the deduction is calculated as:

  20% of qualified business income from the trade or business, plus

  20% of REIT dividends and qualified publicly traded partnership income.

For purposes of the deduction, qualified business income is calculated separately from REIT dividends and publicly traded partnership income.

The calculation of qualified business income is subject to a number of thresholds and limitations. Netting and loss carryover rules also apply.

Taxable Income Limitation

The deduction cannot exceed 20 percent of the owner’s net taxable income reduced by the amount of net capital gains.

Taxable Income Thresholds

The qualified business income calculation — including applicable limits and phase-ins/outs — depends on three taxable income thresholds. For this purpose, taxable income is determined without factoring in the deduction for qualified business income.

These thresholds establish the income levels at which owners become subject to various phase-in and phase-out rules and, in one case, become ineligible for the deduction. The specifics depend on the amount of income and the type of business. For estates and trusts, the thresholds are determined at the trust level without considering distributions.

At the first threshold, a business owner with taxable income of $157,500 or less (for a single person, an estate or a trust) or $315,000 or less (for a married couple filing jointly) is eligible for the deduction, regardless of the type of business. Above this threshold, eligibility and phase-in and phase-out rules may apply.

In future years, the threshold amounts will be indexed for inflation.

Owner’s Taxable Income Specified Service Businesses All Other Businesses
≤ $157,500 (Single, Estate, Trust)
or ≤ $315,000 (Married)
Eligible for 199A

No W-2 wage limit

Eligible for 199A

No W-2 wage limit

$157,501 — $207,499 (Single, Estate, Trust)
or $315,001 — 414,999 (Married)
Eligible for 199A

Phases out based on income

W-2 wage limit phases in

Eligible for 199A

W-2 wage limit phases in

≥ $207,500 (Single, Estate, Trust)
or ≥ $415,000 (Married)
Not eligible for 199A Eligible for 199A

Subject to W-2 wage limit

These thresholds do not apply to REIT dividends or publicly traded partnership income which are calculated separately from qualified business income.

W-2 Wage Limitation

If your taxable income is greater than the lowest taxable income threshold, the deduction for qualified income is limited based on wages. As a result, owners of businesses that pay more in wages and invest more in tangible depreciable property benefit most from the deduction.

When fully phased in, the W-2 limitation is equal to the greater of:

  50 percent of your share of the business’ W-2 wages, or

  25 percent of W-2 wages plus 2.5 percent of your share of the unadjusted basis of qualified property — an option that is particularly valuable for real estate businesses.

Let’s break that down.

bullet graphic: green arrow  W-2 Wages

In this context, a business’ W-2 wages refers only to those wages that are allocable to its qualified business income, including deferred compensation and certain Roth contributions. It includes wages the business pays using a separate payroll organization.

If the wages apply to more than one business, they must be allocated proportionately based on the businesses’ total wages.

In the event of an acquisition or disposition of the business (or a major portion of same), the wages are allocated between predecessor/successor entities based on the relevant time periods.

Revenue Procedure 2019-11 provides guidance on how to determine the amount of W-2 wages. It takes the form of three different calculation options, very generally defined as follows:

  unmodified box method — the lesser of the amount reported in box 1 or box 5 of the Forms W-2

  modified box 1 method —  the total amount reported in box 1 on all Forms W-2 after specified modifications

  tracking wages method — total wages subject to federal income tax, after specified modifications

The wages of leased employees and employees paid to provide services for another business do qualify.

For owners with more than one business, the W-2 wage limitation is calculated separately for each business. W-2 wages are allocated among the businesses according to how the wage-related deductions are allocated among them.

bullet graphic: green arrow  Qualifying Property

Qualifying property is depreciable real estate and other tangible property that is used to produce qualified business income during the tax year. It must be held by the business and available for use in the production of qualified business income at the end of the year.

The property must be owned as of the end of the tax year and cannot have reached the end of its useful life at that time.

There is a special anti-abuse rule for property that was acquired within 60 days of the end of the tax year and then disposed of within 120 days after the year.

If the property wasn’t used in the business for 45 days before it was disposed of, it is assumed not to be qualifying property unless there is a demonstrated valid reason for the acquisition.

Additions and improvements to qualified property already placed in service are treated as separate qualified property. Partnership special basis adjustments are treated as separate qualified property to the extent the step-up represents an increase in value in excess of the original basis.

bullet graphic: green arrow  Unadjusted Basis of Qualifying Property

The unadjusted basis of the qualifying property for the calculation is generally equal to the amount paid for the property as of the date it was placed in service.

In this context, the property’s depreciable period begins on the date placed in service and ends after the later of ten years or the last full year of the applicable recovery period (15, 27.5 or 39 years for real property).

For like-kind (1031) exchanges, the depreciable period is generally treated as replacement property under MACRS and is based on the date the relinquished property was first placed in service.

There is an exception for any excess basis in the replacement property. It has a depreciable period beginning on the date the replacement property was placed in service. This creates a dual depreciable period for like-kind exchange property.

The regulations provide additional guidance for certain situations. For example, for inherited property the unadjusted basis is generally the fair market value at the time of the decedent’s death.

A partner’s share of the unadjusted basis of qualifying property is determined based on the partner’s share of the property’s tax depreciation for the year.

Aggregation Rules (Optional)

If you own more than one business that qualifies for the deduction, you have the option to combine, or aggregate, some or all of the qualifying businesses into a single business for calculating your deduction. The aggregation includes each business’ income, wages and unadjusted basis of qualifying property.

Businesses are aggregated at either the entity level, such as partnership or trust or S corporation, or the individual level —  and different owners can aggregate in different ways. You do not have to duplicate or consider any groupings used for the purpose of passive activity losses, or the groupings of other owners.

bullet graphic: green arrow  How to Decide

As a general rule, unless one or more of the businesses to be aggregated is subject to limitations based on W-2 wages or qualified property, there is no advantage to aggregating them. Aggregation is only useful to reduce the impact of these limitations on businesses that are subject to them.

For example, you may be able to increase your qualified business income deduction by aggregating a business that is subject to either or both of these limitations with a business that has excess wages and/or qualified property.

Aggregation also helps to preserve the amount of wages and property from a business that experienced a loss.

Let’s understand why that is.

In calculating the deduction for an aggregated business, you first calculate the qualified business income, W-2 wages and unadjusted basis of qualifying property for each business separately, then combine them. In other words, the aggregated businesses are treated as a single business for purposes of the calculation, preserving the wages and qualifying property of all the businesses for use in the calculation.

If you have more than one business but don’t aggregate, the loss of one business can reduce the positive income of another business, without preserving the W-2 wages and qualified property from the business that generates the loss. This netting process is described in more detail below.

bullet graphic: green arrow  Continuity

If you choose to aggregate any of your businesses, you must continue to aggregate these same businesses in all future years, with a few exceptions.

You can add newly created or acquired businesses to the group as long as they meet all of the requirements for aggregation.

If one or more of the aggregated businesses no longer qualifies, you must re-evaluate the requirements for aggregation relative to all businesses before creating a new group.

The IRS can disaggregate your businesses if you fail to include a statement with your tax return that reports the aggregation.

bullet graphic: green arrow  Requirements to Aggregate

Each trade or business to be aggregated must be a qualifying trade or business. Then, in order to aggregate them, you must satisfy all of the following requirements.

  Majority Interest  The same owner(s) must — directly or indirectly — own at least a 50 percent interest in all of the businesses to be aggregated. This includes any interest owned directly or indirectly by an owner’s siblings, spouse, ancestors and lineal descendants.

  Ownership Period  The above majority interest must exist for the majority of the tax year in which the businesses are included in the owner’s income.

  Tax Year  The businesses must all be on the same tax year.

  No Specified Service Businesses  None of the businesses to be aggregated can be specified service businesses.

  Additional Factors  The businesses must meet at least two of the following factors:

  They provide the same products, services or property that are customarily provided together.

  They share facilities or significant centralized business elements.

  They coordinate with or rely on other businesses in the group.

bullet graphic: green arrow  Reporting Requirements

After businesses are aggregated, relevant pass-through entities or owners must consistently report the aggregated group in subsequent years.

The regulations also provide reporting and disclosure requirements, including identifying the individual businesses included in the aggregated group. Failure to meet these requirements could lead to a forced disaggregation for tax purposes.

Netting Rules

Netting refers to the process of combining the qualified business income of all of an owner’s businesses.

If, after aggregating, you have more than one business, you perform the qualified business income calculation separately for each, then net them. And if you choose to aggregate some but not all of your businesses the aggregated business is netted with the non-aggregated businesses.

It can be a bit confusing, but the sequence is important here.

Aggregation takes place before the netting in the deduction calculation. That means your choice of the businesses to aggregate affects which businesses will absorb the losses from other businesses.

If any one or more of the businesses to be netted has a negative amount of qualified business income, you must allocate the negative amount of income proportionately to all businesses that have positive qualified business income.

In this process, unlike aggregation, the wages and qualifying property of the loss business are not preserved when applying the wage and property limitations.

Also unlike aggregation, netting is not optional and is performed whether or not an owner chooses to aggregate.

Note that the regulations distinguish this calculation from the calculation of REIT dividends and publicly held partnership income or loss.

Loss Carryovers

If, after netting, the amount of qualified business income for all businesses is a loss, that loss is carried over to the next tax year and treated as a separate business for purposes of the calculation.

W-2 wages and qualified property amounts are not carried over.


The qualified business income deduction is an evolving and extremely complex area of the federal tax code. Consult with a tax advisor before making any business or financial decisions based on this deduction, including any change in business entity.


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