IRC §199A lets individuals, estates and trusts deduct up to 20 percent of their qualified business income for tax years beginning after December 31, 2017, and before January 1, 2026. The 199A qualified business income deduction, also known as the “pass-though deduction,” is the lesser of:

  • combined qualified business income (discussed below); or
  • 20 percent of the excess (if any) of taxable income over net capital gain.

Taxable income is determined without regard to the QBI deduction itself. Net capital gain is the sum of:

  1. the excess of net long-term capital gain over net short-term capital loss for the tax year (as discussed at Capital Gains Tax Rates), plus
  2. qualified dividend income (as discussed at Qualified Dividends).


For purposes of the capital gains tax rates, net capital gain is reduced by the amount that the taxpayer elects to treat as investment income. This reduction merely reduces the amount of gains that can be taxed at the maximum capital gains rates, as a trade-off for effectively increasing the taxpayer’s investment interest deduction (see Investment Interest Deduction: Net Investment Income). Thus, capital gains and qualified dividends that are treated as investment income are still net capital gain for purposes of the 199A deduction (Preamble, T.D. 98xx_1, January 21, 2019).

The following examples illustrate the basic calculation of the deduction. All tax items are qualified (see Section 199A Qualified Business Income Deduction Components: QBI, REIT Dividends, and PTP Income); and none of the taxpayers have taxable income that exceeds the threshold amount for the wages/capital limit and the service business income exclusion (see Phase-In of Wages/Capital Limit and Exclusion for Section 199A Qualified Business Income Deduction).

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