199A Pass-Through Deduction: How Does it Work in 2025?

The Section 199A deduction, also known as the qualified business income deduction (QBI), has been critically important to small business owners since it was introduced in the Tax Cuts and Jobs Act (TCJA) in 2017. This deduction has been popular primarily because it allows business owners and entrepreneurs to deduct up to 20% of QBI, which provides significant tax relief and opportunities for pro-growth reinvestments.

Because this deduction was supposed to sunset after 2025, there has been much debate legislatively and in the business community over what to do about it and other temporary pro-business features of the TCJA. Many business leaders and pro-business politicians view the deduction as a public good. In contrast, opponents argue it's unnecessary, disproportionately benefits wealthier taxpayers, and hasn't been a significant economic driver.

Maximizing every eligible tax credit and deduction, including QBI, is an essential business practice, made easier with expert support from 1-800Accountant. Our tax professionals will maximize your business deductions based on the latest changes and updates to tax law, while periodically tweaking tax strategy throughout the year, ensuring compliance.

Continue reading to learn everything you need to know about how the 199A deduction works in 2025 and how to calculate it.

Key Highlights

• Learn what the 199A deduction is and how it impacts taxable income. 

• View who qualifies, including eligible entity types and income thresholds. 

• Refer to our step-by-step guide to calculating the QBI deduction.

• Understand the most common 199A deduction mistakes and how to avoid them. 

What Is the 199A Pass-Through Deduction?

Similar to corporate tax relief, the 199A deduction intended to help small business owners throughout the United States, many of whom operate as a pass-through entity for tax purposes. Pass-through entities aren't taxed at the corporate level. Instead, income is passed through to owners to be taxed at the individual taxpayer level. Types of pass-through entities include: 

• Sole proprietorships 

• Partnerships 

• LLCs

• S corporations

While the 199A deduction and other aspects of the TCJA have been popular, the temporary status, which was supposed to sunset after 2025, had been a source of concern for many small business owners who have benefited from the relief it provided. 

Does 199A Reduce Taxable Income?

Tax credits pay part of the tax you owe, whereas tax deductions reduce your overall taxable income. The 199A deduction is a significant small business tax deduction as it can reduce qualified business income by 20%.

The deduction lowers your income before taxes are applied, which decreases the corresponding taxes you will owe.

QBI Deduction Example

In this simplified scenario, a sole proprietor filing as single has $50,000 in taxable qualified business income at a 20% rate.

• The sole proprietor will owe $10,000 without the QBI deduction. 

• The sole proprietor will owe $8,000 with the QBI deduction.

The $2,000 difference is significant and helps illustrate why so many business owners support making the deduction permanent. 

Who Qualifies for the 199A Deduction?

Eligible Entity Types

Most entity types qualify for the 199A deduction, with C corporations being a notable exception. If you operate as one of the following entities, you most likely qualify for this deduction: 

• Sole proprietorships 

• Partnerships 

• LLCs

• S corporations

SSTB vs. Non-SSTB

A specified service trade or business (SSTB) is a business where the principal asset is a skill or reputation of key owners and employees. SSTBs include: 

• Lawyers 

• Doctors 

• Accountants 

• Consultants 

Because these are examples of high-earning professions, they might not be able to take full advantage of the QBI deduction. If single or joint filers are within the phase-out range, they won't likely be able to claim the full deduction, and if they exceed it, they won't be eligible for the 199A deduction. 2025 phase-out range: 

• Single: $197,300 – $247,300

• Joint: $394,600 – $494,600

Non-SSTBs can also take the QBI deduction, assuming they meet eligibility requirements. Examples of non-SSTBs include: 

• Retail

• Construction 

• Manufacturing  

Income Thresholds

If income thresholds are exceeded, you won't likely be able to take the 199A deduction, and you won't be able to claim the full 20% if your income lands in the phase-out range. The IRS has set the following phase-out range for single and joint filers: 

• $197,300 – $247,300 for single filers 

• $394,600 – $494,600 for joint filers

Remember, if you exceed the phase-out range, you are ineligible for the QBI deduction.

How to Calculate the 199A Deduction

There are a couple of steps you must take to calculate this deduction, along with several other stipulations and limits to account for, especially for businesses and individuals with incomes beyond defined thresholds. 

Step 1: Calculate QBI

Before you can count the deduction, you must add up the relevant income. QBI includes the net total of all your company’s income, gains, losses, and deductions over the given tax period.

However, you should subtract from your QBI any earnings that come from investments or other unqualified income from commodity or currency trading.

If you operate multiple businesses, you should keep the income totals separate and calculate the deduction for each.

Step 2: Apply Income Thresholds

Individuals at higher income levels and in certain professions, such as those considered SSTBs, are limited in their use of the QBI deduction. Where you fall in these requirements depends not on your QBI but on your total taxable income from all sources.

2025 199A deduction phase-out ranges:

• Single: $197,300 – $247,300

• Joint: $394,600 – $494,600

Generally, if your income is less than $197,300 (single) or less than $394,600 (joint) annually, you can take full advantage of this deduction.

Step 3: Apply W-2 Wage and Property Limitations

The 199A deduction is capped at a percentage of wages or qualified property. Qualified property is tangible depreciable property, including buildings, equipment, and machinery. If your taxable income exceeds the 2025 QBI deduction thresholds, it will be limited to the lesser of 20% of your qualified business income or the greater of:

• 25% of W-2 wages paid plus 2.5% of the unadjusted basis immediately after acquisition (UBIA) of qualified property

• 50% of W-2 wages paid by the business

Step 4: Determine Final Deduction

If your total taxable income is low enough, then you qualify to deduct a full 20% of your business income from your taxable income. Review other income scenarios via this table.

Potential 2025 Changes to the 199A Deduction

While the TCJA introduced the QBI deduction to business owners in 2017, it was only a temporary measure that would sunset after 2025. However, due to the passage of the One Big Beautiful Bill Act, the QBI deduction is now a permanent feature of the tax code.

Phase-out rules still apply, but the One Big Beautiful Bill Act expands the income ranges (both amounts are indexed for inflation starting in 2026) over which the deduction is reduced:

• Single filers: Phase-in range increased from $50,000 to $75,000.

• Joint filers: Phase-in range increased from $100,000 to $150,000.

It's difficult to describe the impact of the QBI deduction's permanence as anything but a positive for small businesses. Small business owners and entrepreneurs will still enjoy the reduced tax liability and opportunities to reinvest in their operations, but now they have something else after years of speculation: certainty. This certainty, knowing that the 199A deduction is permanent, allows for planning and implementation of a long-term tax strategy involving business optimization, a compensation plan, and coordination with retirement contributions. 

Maximize the benefits of the permanent QBI deduction with 1-800Accountant's year-round tax advisors supporting your ambitions.  

Common Mistakes to Avoid

While the 199A deduction offers many benefits, there are common mistakes and issues to avoid if you handle your small business's financial work. QBI-related mistakes to avoid include: 

• Misclassifying business type.

• Miscalculating QBI by including ineligible income.

• Missing phase-out rules for SSTBs.

• Not planning purchases or wages strategically.

Steering clear of these mistakes eliminates disruptions and promotes smooth operations. 

FAQs

Does rental income qualify for 199A?
Rental income can qualify for the 199A deduction, provided it meets criteria that other income is generally subject to. If the collection of rental income is regular, continuous, and conducted with a profit motive, it will likely qualify for this deduction. 

Can multiple businesses be aggregated?
Aggregation allows business owners to combine income, W-2 wages, and UBIA of qualified property from multiple businesses to maximize the QBI benefit. To qualify for the aggregation of multiple businesses, you must meet two of the following three criteria: the businesses must provide common products or services, share facilities or operations, and be operated in coordination with each other. 

How does 199A interact with retirement plan contributions?
Retirement contributions can reduce your qualified business income used to calculate the 199A deduction. In general, QBI is based on net business income after deductible expenses, which includes contributions to retirement plans. 

What happens after 2025 if Congress takes no action?
The 199A deduction/pass-through deduction 2025 has been made permanent due to the passage of the One Big Beautiful Bill Act. Had it not been passed by Congress, there's a chance that this deduction would have adhered to its previously scheduled sunset date, after 2025. 

Conclusion & CTA

The 199A deduction offers significant tax relief to small businesses equipped to maximize the savings it provides. However, navigating its complexities and understanding the rules governing thresholds and eligibility can be enough to discourage business owners without professional support. A dedicated accountant or accounting team ensures QBI and other eligible deductions apply to your taxable income.

Effortlessly manage 199A deduction considerations with the help of 1-800Accountant, America's leading virtual accounting firm. Our suite of affordable, tax-deductible financial services, including year-round tax advisory and business tax preparation, is handled on your behalf, so you can spend more time focusing on your next business milestone instead of agonizing over which deductions and credits to take.

Schedule a free 30-minute consultation with a small business expert today to get started.