"Everything You Need to Know About the 199A Deduction in 2025"

“Everything You Need to Know About the 199A Deduction in 2025″ begins with understanding how this powerful tax break — now made permanent — can allow eligible business owners to deduct up to 20% of their qualified business income and significantly lower their federal tax liability.”

Table of Contents

Introduction

The Section 199A deduction, introduced under the Tax Cuts and Jobs Act (TCJA) of 2017, is one of the most valuable tax breaks for small business owners, sole proprietors, and pass-through entities. As of 2025, this deduction remains in effect but is set to expire after December 31, 2025, unless extended by Congress.

This deduction allows eligible taxpayers to reduce their taxable income by up to 20% of their Qualified Business Income (QBI), plus 20% of qualified REIT dividends and publicly traded partnership (PTP) income. With potential changes looming, business owners must act now to maximize their tax savings.

In this guide, we’ll break down:

Who qualifies for the 199A deduction in 2025
How to calculate the deduction with real-world examples
Income thresholds and phase-out rules
Special considerations for rental real estate and SSTBs
Key strategies to optimize your deduction before it expires

Who Qualifies for the 199A Deduction in 2025?

The Section 199A deduction, also called the Qualified Business Income (QBI) deduction, is one of the most valuable tax breaks available to small business owners in 2025. It allows qualifying pass-through businesses to deduct up to 20% of their qualified business income on personal tax returns, which can significantly lower taxable income. However, eligibility isn’t automatic. It depends on your business structure, the type of income you earn, and whether your taxable income falls within certain thresholds set by the IRS for 2025.

In 2025, only pass-through entities can claim the deduction. These include sole proprietorships, partnerships (including LLCs taxed as partnerships), and S corporations. Some trusts and estates also qualify. Businesses structured as C corporations are excluded because they pay corporate tax instead of passing profits to owners. Regular employees earning only W-2 wages also don’t qualify — this deduction is strictly for business owners who report pass-through income on their personal tax returns.

The deduction is based on what the IRS calls Qualified Business Income (QBI), which is essentially your net income from a qualified trade or business conducted in the United States. This includes profits from sole proprietorships, partnerships, and S corporations. However, it does not include wages paid to yourself, guaranteed payments to partners, or most investment income like capital gains, dividends, or passive interest. Foreign income not connected to U.S. operations also does not qualify for the deduction.

Eligibility is further determined by income thresholds and phase-out rules. In 2025, single filers earning below $197,300 or married couples filing jointly earning below $394,600 qualify for the full 20% deduction. Above these levels, the deduction begins to phase out. For single filers, the phase-out range is $197,301 to $247,300; for joint filers, it is $394,601 to $494,600. Once income exceeds these amounts, the calculation changes and, in some cases, the deduction may be eliminated entirely.

For businesses in Specified Service Trades or Businesses (SSTBs) — such as law, accounting, consulting, healthcare, financial services, and performing arts — the rules are stricter. These industries rely heavily on the owner’s skill or reputation, so once income exceeds $247,300 for single filers or $494,600 for joint filers, the deduction phases out completely. Non-SSTB businesses, like retail or manufacturing, may still qualify above these thresholds, but they must meet additional wage and property tests to determine the deduction amount.

Rental real estate can also qualify under Section 199A if it is treated as a trade or business. The IRS offers a safe harbor rule to make this determination easier. To qualify, landlords must maintain separate books for each rental activity, perform at least 250 hours of rental services annually (like maintenance or tenant management), and demonstrate that the rental activity has a profit motive. Meeting these requirements allows rental income to be treated as QBI and qualify for the deduction.

In 2025, there’s added urgency because of potential legislative changes. Under current law, the QBI deduction is set to expire at the end of 2025 as part of the 2017 Tax Cuts and Jobs Act sunset provisions. A bill proposed in Congress would make the deduction permanent, increase it from 20% to 23% starting in 2026, and potentially loosen phase-out rules. Until any changes are passed, however, 2025 may be the last full year to claim this deduction under current terms.

For small business owners, this deduction can mean thousands of dollars in tax savings. For example, if your qualified business income is $100,000, the 20% deduction reduces taxable income by $20,000. At a 22% tax rate, that’s $4,400 saved. To maximize benefits, you should monitor income levels, optimize salary versus distributions for S Corps, and plan deductions like retirement contributions or equipment purchases strategically. This level of planning can be the difference between receiving the full deduction or missing out entirely.

Because the rules are complex — especially for high-income earners, SSTBs, or rental property owners — working with a tax advisor is strongly recommended. A professional can run projections, help manage income to stay under thresholds, and ensure you meet all recordkeeping requirements. Careful year-round planning is key to qualifying for and maximizing the 199A deduction in 2025.

How to Calculate the 199A Deduction in 2025: Step-by-Step

What Is the Section 199A Deduction?

Think of the Section 199A deduction — also called the QBI deduction — as one of the best tax breaks for small business owners. It lets you knock off up to 20% of your business profit when you file your personal tax return. So, if your business earns $100,000 in profit, you might only have to pay taxes on $80,000. This rule was added to give pass-through businesses — like sole proprietors, partnerships, and S corporations — a tax break similar to what big corporations got when their rate dropped to 21%.

Who Actually Gets This Deduction?

You only qualify if you own a pass-through business — meaning the profits go straight to your personal tax return instead of being taxed at the corporate level. Freelancers, LLC owners, partners, and S corp shareholders all fall into this group. But if you’re an employee getting a W-2, this deduction doesn’t apply to your wages. It also doesn’t apply to investment gains, dividends, or income earned outside the U.S.

What Counts as Qualified Business Income (QBI)?

Qualified Business Income is basically your net profit after expenses — but with some exclusions. For example, if you pay yourself a salary from your S corporation, that salary doesn’t count as QBI; only the leftover profit does. The same goes for capital gains, dividends, and interest — those aren’t included. In short, it’s the profit your U.S.-based business actually makes after expenses, which becomes the starting point for this deduction.

Income Limits You Need to Watch

Whether you get the full 20% deduction, a reduced amount, or nothing at all depends on your taxable income. For 2025:

Single filers: Full deduction up to $197,300; starts phasing out after that and completely gone above $247,300.
Married filing jointly: Full deduction up to $394,600; phase-out up to $494,600; above that, tougher rules kick in.

If you’re under these numbers, life is easy — you get the full deduction. If you’re over, the rules get more complicated, especially for certain types of businesses.

What If Your Business Is “Service-Based”?

Some industries — like law, accounting, consulting, healthcare, and financial services — are labeled as Specified Service Trades or Businesses (SSTBs). If you’re in one of these, you’ll lose the deduction completely once your income passes the top threshold. If you’re under the limit or in the middle range, you may still qualify for part of it. Non-service businesses, like real estate or retail, aren’t hit as hard — they can still claim the deduction even if they earn above the limits, but with other restrictions.

Wages and Property Rules for High Earners

If your income is above the limit, your deduction doesn’t just default to 20% of profit anymore. Instead, it’s capped based on either:

50% of wages your business pays to employees, or
25% of wages plus 2.5% of the original cost of property you own (like rental buildings).

This means if you have little or no payroll and no significant property, you might not qualify for the deduction at all once you cross the income thresholds.

How You Actually Calculate It

Here’s the basic process:

Figure out your qualified business income (your net profit after removing non-eligible items).
Check if your taxable income is under the threshold — if yes, you get a simple 20% deduction.
If you’re in the phase-out range, a formula reduces how much you can claim.
If you’re above the limit, service businesses lose it entirely, while non-service businesses apply the wage/property cap to see what they qualify for.
Finally, the deduction can never be more than 20% of your total taxable income minus capital gains.

Example 1: Freelancer Under the Limit Say you’re a freelance designer with $90,000 in profit and total taxable income of $150,000. You’re under the $197,300 limit, so the calculation is simple: 20% of $90,000 = $18,000 deduction. That lowers the income you’re taxed on to $132,000 — an immediate tax savings.

Example 2: S Corporation in Phase-Out Range (Service)

Now imagine you’re a marketing consultant running an S corporation. After paying yourself a $100,000 salary, your business has $150,000 profit. Your taxable income is $220,000, which falls in the phase-out range for service businesses. Normally, 20% of $150,000 would give you a $30,000 deduction, but because it’s a service business and you’re in the middle range, that amount gets scaled down — you only get part of the deduction, not all of it.

Example 3: Real Estate Investor Above Threshold

Picture a landlord with $120,000 in rental income and $300,000 taxable income (married filing jointly). They pay $40,000 in W-2 wages to a property manager and have $2 million in property value. Their 20% deduction would be $24,000. The wage/property test allows 25% of wages ($10,000) plus 2.5% of property ($50,000), giving $60,000. The deduction is whichever is lower — in this case, $24,000. They qualify for the full amount because their limit is higher than the 20% calculation.

Example 4: High-Income Service Business (No Deduction)

Finally, think about a lawyer earning $300,000 in profit with total taxable income of $500,000 (married filing jointly). Because this is a service business and they’re over the $494,600 top limit, the deduction is gone completely. No amount of wages or property can bring it back.

Income Thresholds & Phase-Out Rules for the 199A Deduction in 2025

The Section 199A deduction — better known as the Qualified Business Income (QBI) deduction — is a major tax break for small business owners and self-employed individuals. It lets you deduct up to 20% of your qualified business income on your personal tax return. But there’s a catch: the higher your income, the more restrictions apply, especially if your business is in certain service-based industries (called Specified Service Trades or Businesses, or SSTBs).

Filing Status	Full Deduction Below	Phase-Out Range	No Deduction Above
Single	$197,300	$197,301 – $247,300	$247,300+
Married (Joint)	$394,600	$394,601 – $494,600	$494,600+

How this works:

If you’re under the lower threshold, you can take the full 20% deduction with no restrictions.
If your income falls inside the phase-out range, the deduction shrinks proportionally until it’s gone (for SSTBs) or limited (for non-SSTBs).
If you’re over the top limit, SSTBs lose the deduction entirely, while non-SSTBs must pass wage/property tests to claim it.

How the Phase-Out Rules Work

The phase-out rules differ depending on whether your business is an SSTB or not.

A. Specified Service Trades or Businesses (SSTBs)

SSTBs are businesses where the value primarily comes from the owner’s skill or reputation — for example, law, accounting, consulting, financial services, health care, performing arts, and athletics.

Rules for SSTBs in 2025:

Below threshold: Full 20% deduction allowed.
In phase-out range: Deduction is gradually reduced until it’s completely gone at the upper limit.
Above upper limit: No deduction at all.

Example:
A single attorney earns $220,000 in taxable income. That’s 45% into the phase-out range ($220K – $197.3K is about halfway to $247.3K). Their 20% deduction would be reduced by about 45%, leaving them with a partial deduction rather than the full amount.

Non-service businesses don’t lose the deduction completely at high incomes, but they face a wage/property limit instead. This means your deduction is capped at:

50% of W-2 wages paid by the business,
25% of W-2 wages plus 2.5% of the unadjusted basis of property (UBIA) — whichever is greater.

Example:
A married couple earns $450,000 from rental properties and pays $60,000 in W-2 wages to staff. Their deduction is capped at $30,000 (50% of wages), even if 20% of their QBI would have been higher.

3. Possible Legislative Changes (2025–2026)

A bill passed by the House in May 2025 could significantly expand this deduction starting in 2026. Proposed changes include:

Increasing the deduction rate from 20% to 23%.
Removing the SSTB phase-out cap, so high-income service professionals (like doctors or lawyers) could still claim part of the deduction.
Adding a new two-step calculation for taxpayers above the income thresholds:
1. Apply wage/property limits.
2. Allow a 23% deduction, reduced by 75% of the income above the threshold.

Example of the new impact:
Under current rules, a single attorney earning $350,000 gets no deduction. Under the proposed law, they could claim around $6,725 — not huge, but better than zero.

4. Special Situations

Rental Real Estate

Must meet IRS “trade or business” standards to qualify (like showing 250+ hours of rental activity annually).
Safe harbor rules apply — for example, keeping separate books and demonstrating an intent to profit helps secure eligibility.

Business Development Companies (BDCs)

The House bill also proposes extending the QBI deduction to dividends from BDCs, treating them similarly to REIT (Real Estate Investment Trust) dividends.

Why These Rules Matter

The 199A deduction can mean thousands of dollars in tax savings each year, but the rules are complicated. If you’re close to the income thresholds, small adjustments — like contributing to a retirement plan, managing W-2 wages, or structuring rental activity properly — can make the difference between losing the deduction and getting the full benefit.

With Congress debating changes, planning ahead for 2026 could be just as important as understanding the 2025 rules.

Special Considerations for Rental Real Estate and SSTBs

The Section 199A deduction — also called the Qualified Business Income (QBI) deduction — offers up to a 20% tax break on qualified income from pass-through entities. But not all income is treated the same. Two areas that often cause confusion are rental real estate activities and Specified Service Trades or Businesses (SSTBs). Both have unique restrictions, safe harbors, and planning opportunities that taxpayers need to understand.

1. Rental Real Estate: How to Qualify for the 199A Deduction

Rental income doesn’t automatically qualify for the QBI deduction. The IRS looks at whether your rental activity rises to the level of a “trade or business” — in other words, are you actively running it like a business or is it more of a passive investment? Here’s how to figure that out.

A. IRS Safe Harbor Rules

In 2019, the IRS created a safe harbor (Rev. Proc. 2019-38) that landlords can use to simplify qualification. If you meet this safe harbor, your rental activity is automatically treated as a trade or business for 199A purposes. To qualify in 2025, you need to meet all of these conditions:

Separate books and records must be kept for each rental activity or group of similar rentals (e.g., residential vs. commercial).
250+ hours of rental services must be performed each year. This includes tasks like advertising properties, negotiating leases, collecting rent, coordinating repairs, or supervising contractors.
Documentation is critical — you must maintain logs showing who performed the work, what tasks were done, and when.
Triple net leases are generally excluded. If your tenants pay property taxes, insurance, and maintenance (typical of NNN leases), the activity won’t qualify under safe harbor unless you provide significant extra services.

Important: Even if you fail the safe harbor, your rentals can still qualify for the deduction if they meet the general trade-or-business standard under IRC §162 — meaning there’s a profit motive, regular activity, and continuity.

B. Factors for Rentals Outside Safe Harbor

If you don’t qualify under the safe harbor, the IRS and courts look at several factors to decide if your rentals still rise to a trade or business:

Property Type: Residential properties often require less active management than commercial properties, which may affect eligibility.
Number of Properties: Managing multiple properties strengthens your case — the more properties you oversee, the more likely it’s considered a business.
Level of Involvement: Activities like screening tenants, arranging repairs, and collecting rent show active participation. Passive ownership, on the other hand, weakens your case.
Lease Terms: Short-term rentals often involve more active work (e.g., cleaning, guest turnover) than long-term leases, which can help meet the trade-or-business standard.

Example:
A landlord owns 10 residential units, hires a property manager, but still oversees leases, sets rental terms, and coordinates major repairs. Even if they miss the safe harbor, this active involvement likely qualifies them for the 199A deduction. In contrast, someone renting a single vacation property passively through an agency with minimal involvement probably won’t qualify.

2. Specified Service Trades or Businesses (SSTBs)

SSTBs are businesses where the primary asset is the skill or reputation of the owner — think professions like law, accounting, consulting, healthcare, financial services, performing arts, or athletics. These businesses face stricter 199A rules, especially when income is high.

A. 2025 Phase-Out Rules for SSTBs

For SSTBs, the 199A deduction phases out entirely once your income exceeds certain limits. Here’s how it works in 2025:

Filing Status	Full Deduction Below	Phase-Out Range	No Deduction Above
Single	$197,300	$197,301 – $247,300	$247,300+
Married (Joint)	$394,600	$394,601 – $494,600	$494,600+

How this applies:

Below the lower limit? Full 20% deduction applies.
In the middle range? Deduction reduces proportionally — the further into the range you go, the more you lose.
Above the upper limit? Deduction is gone for SSTBs — no matter your wages or property.

Example:
A single lawyer with $220,000 taxable income is about halfway through the phase-out range. They’d lose roughly 45% of their deduction. If their income were $247,300 or higher, the deduction would drop to zero.

B. Anti-Abuse Rules for SSTBs

The IRS actively prevents “cracking and packing,” where taxpayers try to split SSTB income into a separate non-SSTB entity to sidestep the limits.

Two key rules to watch:

Related-Party Rentals: If an SSTB rents property from an entity owned by the same person (or family), that rental income is also treated as SSTB income and subject to the same limits.
Attribution Rules: Ownership by spouses or family members is combined — so you can’t shift property or business interests to relatives to bypass the SSTB rules.

Example:
An accountant owns both an accounting firm (SSTB) and a separate LLC that rents office space to the firm. Because they own more than 50% of both, the IRS treats the rental income as SSTB income — disqualifying it from 199A once above the income thresholds.

3. Proposed Legislative Changes for 2026

A House Republican bill passed in May 2025 proposes major updates starting in 2026:

Bigger deduction: Increase from 20% to 23%.
End of SSTB phase-out: High-income professionals like doctors and lawyers could still get a partial deduction, even above $247,300/$494,600.
New formula for high earners: The deduction would equal 23% of QBI minus 75% of income over the threshold (after wage/property limits).

Example Impact:
A single SSTB owner earning $350,000 currently gets no deduction. Under the new proposal, they’d get about $6,725 — not huge, but far better than nothing.

4. Key Takeaways

For Rental Real Estate

Use the safe harbor (250+ hours, separate records) whenever possible to simplify qualification.
If you don’t meet safe harbor, focus on showing active business involvement — number of properties, tenant management, and repairs matter.
Avoid triple net leases unless you provide additional services that demonstrate business activity.

For SSTBs

Keep a close eye on income thresholds — crossing into the phase-out range can drastically reduce or eliminate your deduction.
Be cautious with related-party structures — renting property to your own SSTB often “taints” the rental income as SSTB income.
Watch for upcoming law changes in 2026 — they could dramatically expand eligibility and deduction amounts for high earners.

Key Strategies to Optimize the 199A Deduction Before It Expires in 2025

The Qualified Business Income (QBI) deduction — often called the Section 199A deduction — is a tax break that lets owners of pass-through businesses deduct up to 20% of their qualified business income. Unless Congress acts, it’s set to expire after December 31, 2025.

For millions of small business owners — sole proprietors, partnerships, S corporations, and certain trusts/estates — this deduction has been a game changer. But because the rules are complex and income limits can phase out your eligibility, planning ahead is critical.

Here are seven strategies to help you lock in the maximum benefit while it’s still available.

1. Reevaluate Your Business Structure

Consider an S Corporation Election

If you’re currently operating as a sole proprietorship or single-member LLC, switching to an S corporation can be a smart move. Here’s why:

S corps let you split income into two parts — a reasonable salary (subject to payroll taxes) and distributions (potentially eligible for the QBI deduction).
This structure can help reduce self-employment taxes and preserve more QBI-eligible income.
It’s especially useful if your income is above the phase-out thresholds, because salaries don’t count as QBI but distributions do.

Example:
A consultant earning $250,000 as a sole proprietor might pay more in self-employment taxes and lose part of the deduction. By electing S corp status, paying themselves a reasonable $100,000 salary, and taking the rest as distributions, they could save around $15,000 in combined taxes.

Aggregate Multiple Businesses

If you own multiple related businesses — say, a rental property LLC and a service company — you may be able to combine (aggregate) them for 199A purposes.

Aggregation can increase your W-2 wage base or property basis (UBIA), which may help you qualify for a larger deduction if income is high.
For example, combining a profitable rental with an operating business that pays wages could help you bypass the wage/property limitation that kicks in above the thresholds.

2. Manage Taxable Income to Stay Below Phase-Outs

The QBI deduction starts phasing out at $197,300 (single) and $394,600 (married filing jointly) in 2025. Staying under these numbers — even slightly — can mean the difference between a full deduction and none at all.

Ways to Manage Income:

Defer income: Delay billing clients until January 2026 to reduce 2025 taxable income.
Accelerate deductions: Prepay expenses like rent or stock up on supplies before year-end.
Max out retirement contributions: Contribute to a Solo 401(k) or SEP IRA — both reduce taxable income and boost retirement savings.
Leverage HSAs: If eligible, contribute to a Health Savings Account, which lowers income and provides tax-free funds for medical costs.

3. Increase W-2 Wages or Qualified Property

For high-income business owners, the deduction is limited by either:

50% of W-2 wages paid by the business, OR
25% of W-2 wages plus 2.5% of the unadjusted basis of qualified property (UBIA).

If your income is above the phase-out, boosting wages or property can unlock a bigger deduction.

How to Do This:

Hire employees: Even one full-time employee can help meet the wage test and preserve the deduction.
Invest in depreciable property: Buying equipment or real estate before year-end adds to UBIA, which factors into the limit calculation.

4. Optimize Rental Real Estate for QBI

Rental income doesn’t automatically qualify — it must rise to the level of a trade or business. The IRS provides a safe harbor to simplify this:

Perform at least 250 hours per year of rental services (maintenance, advertising, tenant screening, etc.).
Keep detailed records of hours, tasks, and who performed them.
Avoid triple net leases (where tenants pay property taxes, insurance, and maintenance) unless you add extra services.

Separate Active vs. Passive Rentals

Short-term rentals (like Airbnb) usually require more active management and are easier to qualify. Passive long-term leases may qualify if you’re heavily involved in operations, but not if you’re hands-off.

5. Restructure SSTB Income (If Possible)

If you’re in a Specified Service Trade or Business (SSTB) — law, accounting, consulting, healthcare, financial services — the deduction phases out entirely once income exceeds $247,300 single / $494,600 joint. But there are planning options:

Spin off non-service income: If you sell products or rent equipment, consider creating a separate entity for that income. Non-SSTB revenue may still qualify for the deduction.
Use a C corporation for excess income: At very high income levels, where the QBI deduction is completely phased out, a C corporation’s flat 21% tax rate might be more efficient.

6. Watch for Legislative Changes

In May 2025, the House passed a bill that could reshape the deduction starting in 2026:

Make the deduction permanent.
Increase it from 20% to 23%.
Remove the strict SSTB phase-out, allowing high-income service professionals to claim at least a partial deduction.

If passed, these changes might even apply retroactively — so keep an eye on Congress for updates.

7. Document Everything and Work With a Tax Pro

The QBI deduction is claimed using IRS Form 8995 (simpler cases) or Form 8995-A (complex cases). To protect your deduction:

Maintain accurate wage and property records (for high-income limits).
Keep detailed logs for rental activities (especially if using the safe harbor).
Consult a CPA or tax advisor to model scenarios like entity conversions, income shifting, and investment timing.

conclusion

The Section 199A deduction is one of those tax breaks that can quietly save small business owners a huge amount of money — but it won’t be around forever. Unless Congress decides to extend it, this 20% deduction disappears after December 31, 2025. That makes this year a critical window to take action.

If you own a pass-through business, a little planning could go a long way. Adjusting your business structure, managing your taxable income, boosting wages or property basis, and keeping solid records — especially for rental real estate — can all help you qualify for the full benefit. And with potential legislative changes that might expand or extend the deduction, staying informed is just as important as acting now.

The rules are complicated, and every situation is different. Sitting down with a tax professional before year-end can give you a clear picture of where you stand and what moves make sense for you. A few strategic decisions now could mean thousands in savings when you file your 2025 return.

“Everything You Need to Know About the 199A Deduction in 2025”