Section 199A QBI Deduction: Aggregation, SSTB Rules, and Maximizing the 20% Pass-Through Deduction
IRC 199A provides a deduction equal to 20% of qualified business income (QBI) from pass-through entities (sole proprietorships, partnerships, S-Corps, and certain trusts/estates). The deduction was enacted under the TCJA and made permanent by the OBBBA. For taxpayers below the income threshold ($197,300 single, $394,600 MFJ for 2025; $201,750 and $403,500 for 2026), the deduction is straightforward: 20% of QBI, limited to 20% of taxable income. Above the threshold, the deduction is subject to wage and property limitations, and specified service trades or businesses (SSTBs) lose the deduction entirely once fully phased out. The QBI deduction reduces income tax but NOT self-employment tax.
QBI deduction calculation:
Below the threshold ($197,300 single / $394,600 MFJ, 2025): QBI Deduction = 20% of QBI (no further limitations)
Above the threshold (phase-in range: $50,000 single / $100,000 MFJ above threshold for 2025; $75,000 / $150,000 from 2026): QBI Deduction = LESSER of:
- 20% of QBI, OR
- The GREATER of:
- 50% of W-2 wages paid by the business, OR
- 25% of W-2 wages + 2.5% of UBIA (unadjusted basis immediately after acquisition) of qualified property
SSTBs above the threshold:
| Taxable Income | SSTB QBI Deduction |
|---|---|
| Below $197,300 (S) / $394,600 (MFJ) (2025) | Full 20% deduction |
| Phase-in range ($50K single / $100K MFJ for 2025; $75K / $150K from 2026) | Proportional reduction |
| Above $247,300 (S) / $494,600 (MFJ) (2025) | ZERO (completely lost) |
What qualifies as an SSTB (specified service trade or business):
| SSTB (no deduction above threshold) | NOT SSTB (deduction available) |
|---|---|
| Accounting, law, consulting | All trades (HVAC, plumbing, electrical) |
| Financial services, brokerage | Construction, manufacturing |
| Health care (doctors, dentists, therapists) | Retail, wholesale |
| Performing arts (actors, musicians) | Real estate (agents, brokers, property management) |
| Athletics (professional athletes) | Engineering, architecture |
| Bookkeeping | Insurance agents |
| Actuarial science | Farming |
OBBBA updates to QBI (Section 199A made permanent):
- The deduction is now PERMANENT (was made permanent by the One Big Beautiful Bill Act)
- The phase-in range widens to $75,000 single / $150,000 MFJ from 2026; for 2026 the SSTB deduction phases out between $201,750 and $276,750 single and $403,500 and $553,500 MFJ
- A $400 minimum deduction applies from 2026 for taxpayers with at least $1,000 of QBI from active businesses they materially participate in
Aggregation election (Reg. 1.199A-4): Multiple businesses can be aggregated if they share:
- Common ownership (50% or more of each business)
- Two of three factors: centralized purchasing, shared facilities/equipment, shared employees
When aggregated, the businesses are treated as a single trade or business for the W-2 wages and UBIA limitations. This can help when one business has high wages but low income and another has high income but low wages.
How does QBI work with multiple activities?
How does an S-Corp owner’s salary affect the QBI deduction?
It cuts both ways. Reasonable compensation the S-Corp pays you isn’t qualified business income, so a higher salary shrinks QBI. Above the income threshold, though, the deduction is limited by W-2 wages, and your own salary should count toward those wages (an inference from the definition, since officers are employees). Below the threshold, the wage limit doesn’t apply.
The current figures, after P.L. 119-21:
- Thresholds: $197,300 ($394,600 joint) for 2025; $201,750 ($403,500 joint) for 2026.
- Phase-in range: $75,000 ($150,000 joint) from 2026, up from $50,000 ($100,000 joint). It covers both the wage limit and the SSTB phase-out.
- Section 199A no longer expires after 2025, and from 2026 there’s a $400 minimum deduction for taxpayers with at least $1,000 of QBI from active businesses they materially participate in.
None of this lets you trim salary below what’s reasonable for your work. The IRS can still reclassify distributions as wages.
How do specified service trades or businesses affect your QBI deduction?
Specified service trades or businesses (SSTBs) including law, medicine, accounting, consulting, financial services, and performing arts face a phase-out of the QBI deduction at higher income levels. For 2025, the QBI deduction phases out for SSTBs between $197,300 and $247,300 for single filers and $394,600 and $494,600 for joint filers, with zero deduction above the upper threshold. Non-SSTB businesses above the income threshold are limited to the greater of 50% of W-2 wages or 25% of W-2 wages plus 2.5% of the unadjusted basis of qualified property, but they never lose the deduction entirely. The SSTB classification looks at the principal asset of the business, so if more than 10% of gross receipts come from specified service activities (5% for businesses with over $25 million in gross receipts), the entire business is treated as an SSTB.
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Yarik Yarosh, CPA. "Section 199A QBI Deduction: Aggregation, SSTB Rules, and Maximizing the 20% Pass-Through Deduction." Blue Cloud CPA, September 5, 2026, updated September 23, 2026. https://bluecloudcpa.com/guides/small-business-section-199a-qbi-aggregation-rules
This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.