26 U.S.C. § 199A — Qualified business income

(a) Allowance of deduction This subsection sets up the main deduction. It applies to taxpayers who are not corporations. Subject to a special rule in (i), here's how to figure the deduction for the year: compare two numbers and take the smaller one. Number 1: the taxpayer's "combined qualified business income amount" (defined in (b)). Number 2: 20% of the amount left over when you subtract the taxpayer's "net capital gain" (as defined in section 1(h)) from the taxpayer's taxable income for the year. Whichever of these two numbers is smaller becomes the deduction. (b) Combined qualified business income amount (1) In general: To find this amount, add two things together. First, add up the amount figured under (2), below, separately for each "qualified trade or business" the taxpayer runs. Second, add 20% of the taxpayer's qualified REIT dividends and qualified publicly traded partnership income for the year. (2) Determination of deductible amount for each trade or business: For each qualified trade or business, compare two numbers and take the smaller: Number 1: 20% of the qualified business income from that trade or business. Number 2: the larger of (i) 50% of the W-2 wages paid in that trade or business, or (ii) 25% of those W-2 wages plus 2.5% of the "unadjusted basis" of qualified property in that business right after it was bought. (3) Modifications to limit based on taxable income: This part changes the rule in (2) depending on how much taxable income the taxpayer has. (A) Exception from limit: If the taxpayer's taxable income for the year is below a "threshold amount" (defined in (e)(2)), then the wage-and-property limit in (2)(B) doesn't apply at all — the taxpayer just uses 20% of qualified business income under (2)(A), with no wage cap. (B) Phase-in of limit for certain taxpayers: This is for taxpayers whose income is a bit above the threshold. Here's how it works, step by step: Step 1: Check if the taxpayer's taxable income is more than the threshold amount, but not more than the threshold amount plus $75,000 (or plus $150,000 for a married couple filing jointly). Step 2: If so, and if the wage-and-property amount from (2)(B) turns out to be less than the 20%-of-income amount from (2)(A), then a special partial limit applies instead of the full limit. Step 3: To find that special limit, start with the (2)(A) amount (20% of qualified business income), and reduce it by a "reduction amount." Step 4: Figure the reduction amount like this: first find the "excess amount," which is the (2)(A) amount minus the (2)(B) amount. Then multiply the excess amount by a fraction: the taxpayer's taxable income above the threshold, divided by $75,000 (or $150,000 for joint returns). That product is the reduction amount. In short, as income rises through this phase-in range, the wage-and-property limit gradually kicks in more and more, until it applies in full once income passes the top of the range. (4) Wages, etc.: (A) In general: "W-2 wages" means the wages a business reports to the Social Security Administration under section 6051(a)(3) and (8), paid to its employees during the calendar year that ends in the tax year. (B) Limitation to wages attributable to qualified business income: Wages that aren't properly counted as part of qualified business income under (c)(1) don't count as W-2 wages here. (C) Return requirement: Wages don't count unless they were reported to the Social Security Administration by the 60th day after the return's due date (including extensions). (5) Acquisitions, dispositions, and short taxable years: The Secretary of the Treasury must write rules for applying this subsection when a business has a short tax year, or when the taxpayer buys or sells most of a trade or business, or most of a separate unit of one, during the year. (6) Qualified property: (A) In general: "Qualified property" is tangible, depreciable business property that (i) the business still holds and can use at the end of the tax year, (ii) was used at some point during the year to help produce qualified business income, and (iii) is still within its "depreciable period" (defined next) as of the end of the tax year. (B) Depreciable period: This period starts on the date the property was first put into service. It ends on whichever comes later: (i) 10 years after that start date, or (ii) the last day of the last full year of the property's normal tax depreciation schedule under section 168, ignoring any bonus depreciation rules. (7) Special rule for income received from cooperatives: If a taxpayer is a patron of a farm or horticultural cooperative, the amount figured under (2) for that trade or business gets reduced. The reduction equals the smaller of: (A) 9% of the qualified business income properly tied to qualified payments received from the cooperative, or (B) 50% of the W-2 wages tied to that trade or business. (c) Qualified business income (1) In general: "Qualified business income" means the net total of qualifying income, gains, deductions, and losses from a qualified trade or business. It does not include qualified REIT dividends or qualified publicly traded partnership income — those are counted separately. (2) Carryover of losses: If the net total of qualified income, gain, deduction, and loss across all the taxpayer's qualified businesses comes out negative for the year, that negative amount carries forward. It gets treated as a loss from a qualified trade or business in the next tax year, reducing next year's qualified business income. (3) Qualified items of income, gain, deduction, and loss: (A) In general: An item only counts if it (i) is connected with running a trade or business inside the United States, under the rules of section 864(c) (with some technical substitutions), and (ii) is actually included, or allowed as a deduction, when figuring the taxpayer's taxable income for the year. (B) Exceptions: Even if an item would otherwise qualify, these items never count as qualified items: (i) short-term or long-term capital gains and losses; (ii) dividends, or payments that work like dividends; (iii) interest income, unless it is properly connected to running a trade or business; (iv) and (v) certain technical categories of foreign-currency and notional-contract gains and losses, as defined by cross-reference to other tax code sections; (vi) income from an annuity, unless it's connected to the trade or business; and (vii) any deduction or loss connected to any of the excluded items just listed. (4) Treatment of reasonable compensation and guaranteed payments: Qualified business income does not include: (A) reasonable compensation the business pays the taxpayer for services the taxpayer performs for that business; (B) guaranteed payments a partnership pays a partner for services; (C) to the extent regulations say so, other payments a partnership makes to a partner for services; and (D) any amount for which the taxpayer gets a deduction under section 224(a). (d) Qualified trade or business (1) In general: A "qualified trade or business" is any trade or business except (A) a "specified service trade or business," described next, or (B) the "business" of simply working as someone else's employee. (2) Specified service trade or business: This means a trade or business that either (A) falls under a listed category of personal-service businesses defined in section 1202(e)(3)(A) — such as law, health, or consulting-type fields, but not engineering or architecture — or would fall under that category if it were owner-performed rather than employee-performed; or (B) mainly involves investing, managing investments, trading, or dealing in securities, partnership interests, or commodities. (3) Exception for specified service businesses based on taxpayer's income: This softens the SSTB exclusion for taxpayers with lower income. (A) In general: If a taxpayer's taxable income for the year is less than the threshold amount plus $75,000 (or plus $150,000 for a joint return), then: (i) the business doesn't automatically get disqualified just because it's a specified service business, but (ii) only a limited "applicable percentage" of that business's qualified income, deductions, wages, and property counts toward the taxpayer's deduction calculations. (B) Applicable percentage: Figure this percentage by starting at 100% and subtracting a ratio. The ratio is: how much the taxpayer's taxable income exceeds the threshold amount, divided by $75,000 (or $150,000 for a joint return). The result is the applicable percentage — so a taxpayer right at the threshold gets nearly the full 100%, and one at the top of the range gets close to 0%. (e) Other definitions (1) Taxable income: For this section's purposes, taxable income is figured without the itemized-deduction phase-out in section 68, and without subtracting this section's own deduction — except where (g)(2)(B) says otherwise. (2) Threshold amount: (A) In general: $157,500 for most taxpayers, or double that ($315,000) for a married couple filing jointly. (B) Inflation adjustment: For tax years starting after 2018, this dollar amount goes up each year based on the standard cost-of-living adjustment formula in section 1(f)(3), using 2017 as the base year instead of 2016. Any increase gets rounded under the normal rounding rule in section 1(f)(7). (3) Qualified REIT dividend: A dividend from a real estate investment trust counts here only if it is (A) not a capital gain dividend, and (B) not "qualified dividend income" under the lower capital-gains-style tax rate rule. (4) Qualified publicly traded partnership income: For a given qualified trade or business, this is the sum of (A) the taxpayer's share of net qualified income, gain, deduction, and loss from a publicly traded partnership that isn't taxed like a corporation, plus (B) any gain the taxpayer recognizes from selling their interest in that partnership, to the extent the law treats that gain as ordinary income rather than capital gain under section 751(a). (f) Special rules (1) Application to partnerships and S corporations: (A) In general: For a partnership or S corporation, this section applies at the level of each partner or shareholder, not at the entity level. Each partner or shareholder takes into account their own share of the entity's qualified items of income, gain, deduction, and loss. Each partner or shareholder is also treated as having their own share of the entity's W-2 wages and unadjusted basis in qualified property — following rules the Treasury writes. A partner's or shareholder's share of W-2 wages is figured the same way their share of wage expense is figured. Their share of unadjusted basis in qualified property is figured the same way their share of depreciation is figured. For an S corporation, a shareholder's "share" simply means their pro-rata ownership share. (B) Application to trusts and estates: Similar rules that used to apply under an older version of the tax code (section 199, as it read on December 1, 2017) for splitting up W-2 wages among trusts, estates, and beneficiaries also apply here — both for splitting W-2 wages and for splitting the unadjusted basis of qualified property. (C) Treatment of trades or businesses in Puerto Rico: (i) In general: If a taxpayer has qualified business income from Puerto Rico, and that income is fully taxed under section 1, then for that taxpayer, "United States" is treated as including Puerto Rico when figuring qualified business income. (ii) Special rule for applying limit: For that same taxpayer, when figuring W-2 wages for a Puerto Rico business, an exclusion that normally applies to wages paid for services in Puerto Rico does not apply. (2) Coordination with minimum tax: When figuring income for the alternative minimum tax, qualified business income is calculated without the usual AMT adjustments. (3) Deduction limited to income taxes: This deduction only applies for regular income tax purposes — not other taxes, like self-employment tax. (4) Regulations: The Secretary of the Treasury must write regulations needed to carry out this section. These regulations can require or limit how items and wages get allocated, set reporting requirements, and explain how this section applies when businesses are organized in layered ("tiered") structures. (g) Deduction for income attributable to domestic production activities of specified agricultural or horticultural cooperatives This subsection gives a separate deduction to farm and horticultural cooperatives, based on their income from domestic production. (1) Allowance of deduction: (A) In general: A "specified agricultural or horticultural cooperative" gets a deduction equal to 9% of the smaller of (i) its "qualified production activities income" for the year, or (ii) its taxable income for the year. (B) Limitation: (i) In general: This deduction cannot be more than 50% of the cooperative's W-2 wages for the year. (ii) W-2 wages: Figured the same way as under (b)(4), except don't apply the "properly allocable to qualified business income" limit from (b)(4)(B), and don't count wages that aren't tied to the cooperative's domestic production income. (C) Taxable income of cooperatives determined without regard to certain deductions: For this subsection, a cooperative's taxable income is figured without subtracting its usual deductions for patronage dividends and similar payments to its members. (2) Deduction allowed to patrons: (A) In general: If an "eligible taxpayer" (defined in (D)) gets a "qualified payment" (defined in (E)) from the cooperative, that taxpayer can deduct part of the cooperative's own (1) deduction — specifically, the part tied to the production income behind that payment, as long as the cooperative identifies that amount in a written notice mailed to the taxpayer. (B) Limitation based on taxable income: This deduction to the patron cannot be more than the patron's taxable income, figured without the section 68 phase-out and without this deduction itself, but after subtracting the patron's own (a) deduction if they have one. (C) Cooperative denied deduction for portion of qualified payments: The cooperative cannot also reduce its own taxable income under its normal patronage-dividend rules for the part of a payment that the patron already deducted under (A) — this stops the same income from being deducted twice. (D) Eligible taxpayer: This means either (i) a non-corporate taxpayer, or (ii) another specified agricultural or horticultural cooperative. (E) Qualified payment: This means a payment that (i) is a patronage dividend or per-unit retain allocation described elsewhere in the tax code, (ii) comes from a specified agricultural or horticultural cooperative, and (iii) is tied to production income for which the cooperative got a deduction under (1). (3) Qualified production activities income: (A) In general: Start with the cooperative's "domestic production gross receipts" for the year (defined below). Subtract (I) the cost of goods sold tied to those receipts, and (II) other expenses, losses, and deductions properly tied to those receipts (not counting this deduction itself). What's left is the qualified production activities income. (B) Allocation method: The Secretary must write rules for properly dividing up these costs and expenses, even when they aren't directly tied to one specific set of receipts. (C) Special rules for determining costs: (i) In general: If property or a service is brought into the United States, it's treated as if it were purchased, with a cost equal to at least its value right after it entered the country. A similar rule applies to figuring the basis of leased or rented property tied to domestic production income. (ii) Exports for further manufacture: If property was exported for further manufacturing and later brought back, the cost increase under (i) cannot be more than the difference between the property's value when it left the country and its value when it came back after manufacturing. (D) Domestic production gross receipts: (i) In general: This means gross receipts from leasing, renting, licensing, selling, exchanging, or otherwise disposing of an agricultural or horticultural product that the taxpayer manufactured, produced, grew, or extracted — in whole or significant part — within the United States. It does not include receipts from dealing in land itself. (ii) Related persons: These receipts don't include amounts from property leased, licensed, or rented to a "related person" — generally, someone treated as part of the same commonly controlled business group under other tax code rules. (4) Specified agricultural or horticultural cooperative: (A) In general: This is a cooperative, taxed under the special cooperative tax rules, that is engaged in either (i) manufacturing, producing, growing, or extracting agricultural or horticultural products, in whole or significant part, or (ii) marketing agricultural or horticultural products. (B) Application to marketing cooperatives: A marketing cooperative under (A)(ii) is treated as if it manufactured, produced, grew, or extracted the products it markets, as long as its own patrons actually did that work. (5) Definitions and special rules: (A) Special rule for affiliated groups: Commonly controlled corporate groups (called "expanded affiliated groups," defined using a lower, more-than-50%-ownership standard than the usual 80% test) are treated as one single corporation for this subsection. If a partnership's ownership is entirely inside one such group, the partnership and the group are treated as one taxpayer too. The deduction gets divided among group members based on each one's share of qualified production income, unless regulations say otherwise. (B) Special rule for cooperative partners: If a specified agricultural or horticultural cooperative is itself a partner in a partnership, rules similar to the partnership rules in (f)(1) apply. (C) Trade or business requirement: This subsection only counts items that are actually tied to running a real trade or business. (D) Unrelated business taxable income: When figuring the separate tax on unrelated business income (under section 511), this section is applied using "unrelated business taxable income" in place of "taxable income" everywhere it appears in this subsection. (E) Special rule for cooperatives with oil-related income: If a cooperative has income tied to oil or gas production, its deduction under (1) is reduced by 3% of whichever is smallest: its oil-related production income, its overall qualified production income, or its taxable income. (6) Regulations: The Secretary must write regulations needed to carry out this subsection, including rules to stop more than one taxpayer from claiming this deduction for the same production activity. These regulations should be based on the older rules that applied to cooperatives and their patrons under the prior version of section 199, before it was repealed. (h) Anti-abuse rules: The Secretary must (1) apply rules similar to an existing anti-abuse rule (section 179(d)(2)) to stop taxpayers from manipulating a qualified property's depreciable period through deals between related parties, and (2) write rules for figuring the unadjusted basis of qualified property that was acquired through a like-kind exchange or an involuntary conversion (such as property lost to a disaster and replaced with insurance money). (i) Minimum deduction for active qualified business income (1) In general: For a taxpayer who counts as an "applicable taxpayer" (defined next), the deduction under (a) can't be less than $400 — the taxpayer gets whichever is bigger: (A) the deduction figured the normal way under the rest of this section, or (B) a flat $400. (2) Applicable taxpayer: (A) In general: This means a taxpayer whose total qualified business income from all of their "active" qualified trades or businesses adds up to at least $1,000 for the year. (B) Active qualified trade or business: This means a qualified trade or business where the taxpayer "materially participates" — meaning they are regularly, continuously, and substantially involved in running it, under the existing tax-law test for material participation. (3) Inflation adjustment: For tax years starting after 2026, both the $400 amount and the $1,000 amount go up each year, using the standard cost-of-living adjustment formula, with 2025 as the base year instead of 2016. Any increase that isn't already a multiple of $5 gets rounded to the nearest $5.