Section 199A Deduction

If you own a pass-through business in DFW, the Section 199A deduction (the QBI deduction) can cut your federal tax bill by up to 20% of qualified business income. The rules are detailed, but steady, year-round planning can lock in savings before December 31.

What is the Section 199A (QBI) deduction?

• The QBI deduction lets eligible owners of sole proprietorships, partnerships, S corporations, and certain trusts/estates deduct up to 20% of qualified business income.
• C corporations and employees do not qualify.
• The deduction applies to tax years beginning after 12/31/2017 and is scheduled to end after 12/31/2025 unless Congress extends it.

Two components you should know

1. QBI component: up to 20% of QBI from a domestic pass-through business.
2. REIT/PTP component: up to 20% of qualified REIT dividends and qualified PTP income.
   Overall cap: You cannot deduct more than 20% of taxable income minus net capital gains.

Who in North Texas often qualifies?

• Real estate investors and property managers
• Construction, trades, logistics, and manufacturing
• Clinics and dental practices (subject to income limits for specified service trade or business)
• Consultants, IT services, and oilfield support
• Note: W-2 wage income does not qualify.

What counts as QBI (and what does not)

Included in QBI

• Ordinary business profit minus ordinary deductions
• Deductible half of self-employment tax
• Self-employed health insurance deduction
• SEP/SIMPLE/qualified plan deductions

Excluded from QBI

• Capital gains/losses and most portfolio interest
• W-2 wages
• S-corp reasonable compensation
• Partnership guaranteed payments
• Most investment income
• Income not effectively connected to a U.S. trade or business

Income thresholds and phase-ins

• Below the threshold, you generally deduct 20% of QBI (subject to the overall cap).
• Above the threshold, limits can reduce or remove the deduction.
• Thresholds adjust for inflation each year. Check current numbers at tax time.

Limits that can reduce the deduction

Once income passes the threshold, the QBI deduction for each business is limited to the greater of:

• 50% of W-2 wages, or
• 25% of W-2 wages + 2.5% of UBIA (unadjusted basis immediately after acquisition) of qualified property.
  These limits apply per business.

Specified Service Trades or Businesses (SSTBs)

• SSTBs include law, health, accounting, consulting, financial services, and similar fields.
• SSTB owners can claim the deduction only when taxable income stays under the phase-out ceiling.
• Example: A dental practice may qualify at lower income levels but lose the deduction at higher income.

Rental real estate: safe harbor and other paths

• A rental real estate safe harbor can treat a rental as a trade or business if you meet record-keeping and hours tests.
• Rentals can still qualify under Section 162 even if you miss the safe harbor.
• Risks: triple-net leases and weak records often fail tests.

Multiple businesses and aggregation

• You compute the deduction per business.
• Aggregation can help match W-2 wages and UBIA to QBI when rules allow it.
• Losses from one business can reduce the deduction from another.

Simple, local examples

A) Sole proprietor under the threshold

• QBI: $120,000; no employees.
• Deduction: 20% × $120,000 = $24,000 (subject to overall cap).

B) S-corp over the threshold

• QBI before wages: $400,000; shareholder wages: $120,000.
• QBI after wages: $280,000 → tentative 20% = $56,000.
• W-2 limit: max of (50% × $120,000 = $60,000) or (25% × $120,000 + 2.5% × UBIA).
• Deduction: $56,000 if overall cap does not reduce it.

C) Rental with no wages but high UBIA

• QBI: $200,000; W-2 wages: $0; UBIA: $5,000,000.
• 25% W-2 + 2.5% UBIA = 0 + $125,000.
• Tentative 20% of QBI = $40,000 → $40,000 allowed (lesser of $40,000 and $125,000).

D) SSTB near phase-out

• If taxable income rises into the phase-out range, the deduction reduces and can reach $0 at the top of the range.

Year-round planning moves

• Manage taxable income to stay under key thresholds.
• Set S-corp reasonable compensation at a supportable level; document your method.
• Time equipment purchases to increase UBIA when it helps.
• Consider aggregation if you meet the rules.
• Max out retirement plans and HSA to reduce taxable income.
• Keep QBI vs. non-QBI items clearly labeled in your books.
• Recheck your plan every quarter, not only at filing.

QBI Deduction Estimator (fast check)

Use this quick, conservative check to see if planning is needed.

• Step 1: Estimate QBI (ordinary profit minus ordinary deductions).
• Step 2: Multiply by 20%.
• Step 3: If your taxable income is high, compute:
  • 50% of W-2 wages, and
  • 25% of W-2 wages + 2.5% of UBIA.
• Step 4: Your estimated deduction is the lowest of:
  • 20% of QBI,
  • the wage/UBIA limit, and
  • 20% of taxable income minus net capital gains.

Disclaimer: This guide is for general education. It is not tax advice. Laws can change. Please consult a tax professional.

Documentation and compliance checklist

• Maintain clean books with a QBI tag for each line item.
• Keep payroll reports and filed W-2/W-3 copies.
• Track UBIA with placed-in-service dates.
• For rentals: keep logs of hours, invoices, and service records for the rental real estate safe harbor.
• Store all K-1s, REIT/PTP statements, and depreciation schedules.

Forms, deadlines, and filing notes

• Most owners use Form 8995; complex cases use Form 8995-A.
• The deduction sits below the line, so you can take it with the standard deduction or itemize.
• Make key moves by 12/31; file extensions do not move planning deadlines.

Common mistakes in DFW we fix often

• Treating W-2 wages as QBI
• Missing aggregation that could improve limits
• Ignoring UBIA timing on new assets
• Misclassifying an SSTB
• Weak rental records that miss safe harbor
• Waiting until March or April to plan

Who benefits most in North-Central Texas

• Owners with steady profit and payroll
• Capital-intensive rentals and manufacturers
• Service firms that can manage taxable income under the phase-out ceiling
• New investors building rental systems that meet safe harbor rules

Why North Texas Tax Advisors

We plan during the year, not just at filing. We help owners in DFW set wages, model W-2 wage limits and UBIA, and align books with Form 8995/8995-A. We respond quickly to “what-if” questions and stay involved as transactions occur.
*North Texas Tax Advisors is not a CPA firm.