There are special rules for taxpayers who need to calculate the 199A deduction for a qualified trade or business (QTB). A qualified trade or business is any Section 162 trade or business, with three exceptions:

1. A trade or business conducted by a C corporation

2. The trade or business of performing services as an employee.

3. For taxpayers with taxable income that exceeds the threshold amount, specified service trades or businesses (SSTBs).

Let’s take a quick look at the 199A tax deduction results if Gary’s business was a QTB instead of an SSTB.

QTB Example #4 – Taxable Income Below Threshold – Using the same situation as Example #3 the results would have been exactly the same since neither a QTB nor a SSTB has any limitations when the taxpayer’s taxable income is below the threshold amount for the taxpayer’s filing status.  Thus, as with Example #3, Gary’s preliminary 199A deduction would be $70,000 (20% of $350,000) but also limited by his taxable income to $85,000 (20% x $425,000). So the deduction limit would be the lesser of the two: $70,000

QTB Example #5 – Taxable Income Above the Threshold – Unlike a SSTB whose 199A deduction is completely phased out when the taxpayer’s taxable income exceeds the cap, a QTB can still have a deduction based on a so-called wage limitation. Although referred to as the wage limitation, it sometimes includes a percentage of the taxpayer’s business assets.

We will cover the wage limitation in more detail later in the guide, but here is generally how it works:

When the taxpayer’s 1040 taxable income exceeds the cap, in Gary’s case $494,600 ($394,600 + $100,000), the deduction is limited to the lesser of:

The wage limitation is the greater of:

QTB Example #6– Taxable Income Between the Threshold and Cap – As with a SSTB there is a complicated phaseout calculation. So rather than trying to explain how this works, we included the phaseout computation in the QTB worksheets that we have developed.