Unlocking the QBI Deduction: A Deep Dive into IRC Section 199A

The Qualified Business Income (QBI) deduction, introduced under the Tax Cuts and Jobs Act (TCJA), has been a game-changer for small business owners, real estate investors, and self-employed individuals. Found under IRC Section 199A, this provision allows eligible taxpayers to deduct up to 20% of their qualified business income, significantly lowering their tax liability. But the rules can get complex—especially when factoring in income thresholds, business types, and special limitations.  Let‘s break it all down. 

What Is Qualified Business Income (QBI)? 

QBI refers to the net income from a qualified U.S.-based trade or business. It includes income, gain, deductions, and losses from: 

• Sole proprietorships (Schedule C) 

• Partnerships (Form 1065) 

• S corporations (Form 1120S) 

• Certain rental real estate activities (if they qualify as a business) 

• Eligible trusts and estates 

However, not all income counts as QBI. The following are excluded: 

• W-2 wages and guaranteed payments to partners 

• Capital gains or losses 

• Interest income (unless earned in the course of business) 

• Dividends and annuities (unless business-related) 

• Foreign-sourced income not connected to a U.S. business 

How Is the QBI Deduction Calculated? 

At its core, the QBI deduction is 20% of your qualified business income, but with some limitations. 

The formula is: 

QBI Deduction = lesser of (20% × QBI, or W-2 wage and property limitations) 

2024 Thresholds: 

• Single filers: Full deduction if taxable income ≤ $191,950; phase-out begins at $241,950 

• Married filing jointly: Full deduction if income ≤ $383,900; phase-out starts at $483,900 

You generally qualify for the full deduction if your income is below these thresholds. If you’re above, additional limitations apply. 

The Fine Print: Limitations on the QBI Deduction 

1. W-2 Wages and Property Basis Limitation

        If you’re above the phase-out range, your deduction is limited to the lesser of: 

• 20% of QBI, OR 

• The greater of: 

• 50% of W-2 wages paid, or 

• 25% of W-2 wages + 2.5% of the unadjusted basis of qualified property (UBIA) 

       This limitation is significant for businesses that either: 

• Have few employees but significant property (like real estate), or 

• Try to show high profits with little payroll. 

2. Specified Service Trades or Businesses (SSTBs)

Certain “skill-based” professions face even stricter limits. If  you‘re in an SSTB and your income exceeds the phase-out limits, your QBI deduction is completely disallowed. 

SSTBs include: 

• Health 

• Law 

• Accounting 

• Consulting 

• Performing arts 

• Financial services 

• Athletics 

• Investing or trading 

• Any business where reputation or skill is the main asset 

Not considered SSTBs: real estate (if appropriately structured), manufacturing, construction, and retail businesses. 

QBI and Real Estate: Special Considerations 

Yes, rental real estate can qualify for QBI—but only if it rises to a trade or business level under IRC §162. To simplify this determination, the IRS introduced a safe harbor in Revenue Procedure 2019-38: 

The rental activity must meet the following conditions to qualify: 

• 250+ hours of documented rental services per year 

• Proper bookkeeping and documentation 

These services include marketing, leasing, rent collection, maintenance, and tenant management. Simply owning a rental property is not enough. Passive investment doesn‘t qualify. The activity must be regular, continuous, and substantial. 

Example: 

• A single rental property with a property manager and no active involvement? Likely not QBI-eligible. 

• A portfolio of rentals with regular maintenance, leasing activity, and involvement? More likely to qualify. 

Read Also: Why Property Management Accounting Is Essential for Real Estate Growth

Why the W-2 Wage and Property Test Exists 

The wage/property limitations under Section 199A weren‘t added just for complexity‘s sake—they serve real purposes: 

1. Preventing Abuse

Without these limits, high-income individuals could restructure income to maximize deductions and avoid payroll taxes. 

Example: A lawyer runs a solo practice and takes no salary, reporting all income as profit. Without the wage test, they’d get a considerable deduction while sidestepping employment taxes. The rule helps prevent that. 

2. Incentivizing Employment

The law encourages job growth and payroll tax contributions by rewarding businesses that pay employees, primarily through S-corp and partnership structures. 

3. Supporting Capital-Intensive Businesses

Industries like real estate and manufacturing often rely more on property than payroll. That‘s where the 2.5% UBIA test comes in. 

Example: 
A real estate investor owns a complex worth $8 million and hires independent contractors. With little to no W-2 wages, the investor could still qualify for the QBI deduction thanks to their investment in qualified property. 

Final Thoughts 

The QBI deduction can be a powerful tool for reducing taxable income—but only if you understand the rules. The details matter, from income thresholds to SSTB restrictions to rental real estate nuances. 

Whether you’re a self-employed consultant, a small business owner, or a real estate investor, it‘s worth looking at how IRC Section 199A applies to you. 

Need help navigating QBI for your business or real estate holdings? Contact a qualified tax advisor to ensure you optimize your deduction and stay compliant.