199A Definition of Trade or Business
Here, find the definition of a trade or business in regard to the 199A deduction.
This defintion is one of the more important issues related to Sec. 199A. The definition of a “trade or business” describes the kind of activity that can create income for purposes of the 199A deduction.
The tax code does not provide a definitive “bright line” definition of a trade or business, and the regulations simply adopted an existing subjective definition that relies on the outcomes of past court cases and interpretive rules the IRS has issued under Code Sec. 162, which is the most familiar provision using the term “trade or business.” This leaves some room for interpretation; most notably whether rental real estate income qualifies for the Sec. 199A deduction. Our research finds that except for totally passive rental real estate activities such as triple net leases, a rental real estate activity is a trade or business for purpose of Section 199A. But more on this later in the chapter.
The regulation also specifies a "qualified trade or business" means any trade or business other than a specified service trade or business, or the trade or business of performing services as an employee. This was done for the following reasons:
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Specified Service Trade or Business – A special computation was carved out for SSTBs; thus, they are included in the term qualified trade or business.,
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Performing Services as an Employee – Congress does not want employees claiming this deduction on the basis of their wage earnings. With the TCJA’s suspension of the deduction for employee business expenses from the Schedule A for 8 tax years, they specifically added this phrase to make it clear employees do not qualify for the deduction. OBBBA 2025 permanently eliminated employee business expenses as itemized deductions.
The rental or licensing of tangible or intangible property (rental activity) that does not rise to the level of a Section 162 trade or business is nevertheless treated as a trade or business for purposes of Section 199A, but only if the property is rented or licensed to a trade or business which is commonly controlled under §1.199A-4(b)(1)(i) (regardless of whether the rental activity and the trade or business are otherwise eligible to be aggregated under §1.199A-4(b)(1)).