Section 199A Deduction: How It Impacts Small Businesses

Running your own business means finding ways to maximize income while staying compliant with tax regulations. Smart tax planning doesn’t just help you keep more of what you earn—it supports long-term sustainability and growth. 

In late 2017, President Trump signed the Tax Cuts and Jobs Act (TCJA) into law—the most significant overhaul of the U.S. tax code in over 30 years. Now fully in effect, the TCJA continues to shape how independent professionals structure their businesses and approach tax filing. 

One of the most valuable provisions for independent professionals is the deduction for “qualified business income” (QBI). Let’s walk through the key components of this deduction as it stands in 2025, including important updates on eligibility and limitations. Because tax rules can be complex and continue to evolve, we strongly recommend consulting with a tax or legal professional before making changes to your business structure or tax strategy. 

What is the Section 199A deduction?

The TCJA introduced sweeping changes to individual and corporate tax rates, standard deductions, and more. For independent professionals, the most significant change was the creation of a new deduction for pass-through income. 

This benefit, found in Section 199A of the Internal Revenue Code, applies to sole proprietors and owners of pass-through entities—including S corporations, partnerships, and LLCs taxed as such. These businesses “pass through” income to their owners, who then report it on their personal tax returns. 

The Section 199A deduction—previously set to expire after 2025—will now be made permanent for non-corporate taxpayers, including sole proprietors, S corporations, and partnerships. 

What are the basic rules for the Section 199A deduction?

Deduction Rate

The new law increases the deduction rate from 20% to 23% of qualified business income (QBI). 

Expanded Phase-In Thresholds

The phase-in range for limitations based on taxable income has increased: 

• From $50,000 to $75,000 for individual filers 
• From $100,000 to $150,000 for joint filers 

New Minimum Deduction

A new minimum deduction of $400 is now available for taxpayers with at least $1,000 in QBI from businesses in which they materially participate. This amount will also be indexed for inflation in future years. 

Expansion of Eligible Income Sources

In some proposals—most notably the House version—income from qualified business development companies (BDCs) would be included as eligible for the QBI deduction. 

Specified Service Trades or Businesses (SSTBs)

The updated, higher phase-in thresholds now apply to SSTB limitations as well, potentially extending the deduction to more independent professionals in fields like consulting, financial services, and healthcare. 

Inflation Adjustments

Starting in 2026, both the phase-in thresholds and the minimum deduction will be automatically adjusted for inflation, ensuring these benefits remain relevant over time. 

Discover: How to Choose the Best Legal Structure for Your Small Business 

Which businesses qualify for the 199A deduction?

While most businesses qualify for the deduction, there are important limitations for “specified service trades or businesses” (SSTBs). These include: 

• Health 
• Law 
• Accounting 
• Consulting 
• Financial services 
• Performing arts 
• Athletics 
• Brokerage services 
• Any business where the principal asset is the “skill or reputation” of one or more employees 

The good news for independent professionals is that initial concerns that the IRS might broadly interpret the “skill or reputation” clause have largely been addressed. Proposed and finalized regulations clarify that this applies to a narrow group—such as celebrities, influencers, and public figures earning income from endorsements—not the average consultant or freelancer. 

For consulting specifically, the IRS defines it as services that primarily involve providing professional advice to help clients achieve goals or solve problems. If consulting services are bundled with a product sale with no separate payment for the consulting work, they’re generally not classified as SSTBs. 

Check Out: Financial Planning Tips for Independent Professionals 

What are 2025 income thresholds for the 199A deduction?

The QBI deduction remains subject to income limits. For tax year 2025, the deduction begins to phase out for SSTBs once taxable income exceeds: 

• $197,300 for single filers 
• $394,600 for joint filers 

Above those thresholds, SSTBs may no longer qualify for the deduction. For businesses that aren’t SSTBs, additional limitations apply based on W-2 wages paid and the amount of capital invested. 

Here’s a practical example: If your business generates $100,000 in qualified business income and your taxable income falls under the threshold, you could potentially deduct $20,000. At a 24% tax rate, that translates to tax savings of $4,800. 

See: Tax Planning Tips for Independent Contractors 

How does the 199A deduction impact tax planning for independent contractors?

For eligible independent contractors, the QBI deduction can deliver significant savings. However, there’s an important caveat: W-2 employees don’t qualify, and the IRS continues to scrutinize worker classification closely. 

Pay particular attention if: You recently transitioned from employee to independent contractor status with the same company. In these cases, the IRS may presume you’re still an employee for tax purposes. While you can challenge this presumption, you’ll need to demonstrate that your role clearly aligns with independent contractor criteria under federal tax rules. 

How do I maximize the benefits of the Section 199A deduction? 

If you’re an independent professional operating as a sole proprietor or through a pass-through entity, these steps can help you maximize the benefits of the Section 199A deduction under the updated rules: 

• Confirm Your Classification
  Ensure your work arrangement aligns with IRS standards for independent contractor status. If your relationship with a client resembles traditional employment, you may risk losing eligibility for the QBI deduction. 

• Review Your Entity Structure
  Depending on your income level and business activity, it may be worth revisiting whether your current business structure—sole proprietorship, S Corporation, or LLC—is still the most tax-efficient option. 

• If Operating as an S Corporation
  You’re required to pay yourself a reasonable W-2 wage before taking any QBI deduction on remaining pass-through income. Document how your salary is determined and be prepared to justify it if audited. 

• Track Participation
  To qualify for the new minimum deduction, make sure you materially participate in the business. Keep records of time spent and your role in daily operations. 

• Watch Income Thresholds for SSTBs
  If your business falls within a specified service category, be mindful of the phase-in income thresholds. Strategic income management—such as deferring income or accelerating deductions—may help you stay below the limit. 

• Stay Informed About State-Level Differences
  Some states do not conform to federal QBI rules. Check with your tax advisor to understand how Section 199A applies at the state level. 

Learn More: S Corp: Advantages for Small Businesses 

Where can independent contractors find more tax and financial guidance?

Given the complexity of Section 199A, it’s essential to work with your preferred tax or legal advisor to understand how these rules apply to your specific situation. Every business is unique, and professional guidance can help you navigate the nuances while maximizing your tax benefits. 

MBO Partners is here to support independent professionals with guidance and resources, but this content does not constitute legal or financial advice. For detailed tax planning, always consult a qualified professional.