IRS Releases Proposed Regulations on the ยง 199A Qualified Business Income Deduction

The IRS and Treasury have released proposed regulations under newly-enacted Internal Revenue Code Section 199A, which creates a deduction for qualified business income that non-corporate taxpayers receive from passthrough entities.  The proposed regulations expand upon the concepts enacted by Congress and, notably, shut down some strategies that have been contemplated since the enactment of the deduction.

Under Section 199A1, non-corporate taxpayers may deduct up to 20% of their qualified business income from a partnership, S corporation, sole proprietorship, or trust.  However, for taxpayers with taxable income exceeding a threshold amount ($157,500 for single filers and $315,000 for joint filers), the deduction may be significantly reduced.  In such cases, the deduction is limited based upon the W-2 wages paid by the qualified business or the business’ basis in certain depreciable property combined with a more limited amount of W-2 wages.  Also, for taxpayers with income over the threshold amount, most income earned in service professions (called “specified service trades or businesses”, including legal, accounting and health services) does not qualify for the deduction.  The Section 199A deduction will expire for tax years beginning after December 31, 2025. 

The proposed regulations2 are divided into six sections with many definitions and computational rules.  The following topics are addressed, to name a few:

  • Carryover losses when a taxpayer has negative qualified business income for a tax year.
  • Calculating and allocating the W-2 wages and the adjusted basis of depreciable property for purposes of determining the limitation on the 20% deduction.
  • Additional K-1 reporting requirements for passthrough entities to identify an owner’s allocable share of qualified business income, W-2 wages and depreciable property basis and whether or not the entity’s trade or business is a specified service trade or business.
  • Determining what constitutes qualified business income and excluding, generally, capital gain and loss, dividend and interest income (other than trade or business interest such as interest on accounts or notes receivable), and compensatory income.
  • Requirements for electing to aggregate trades or business (including requirements with respect to common ownership and integration of the businesses) for the purpose of calculating the limitation on the 20% deduction based on W-2 wages and depreciable property; disallowance of aggregation for specified service trades or businesses.
  • Definitions of professions and activities that are treated as specified service trades or businesses; a de minimis exception to this treatment if less than 10% of the business’ gross receipts are attributable to a specified service trade or business (5% if the business’ gross receipts are more than $25 million for the year).
  • Narrowing the catchall provision of the specified services limitation by restricting the definition of reputation or skill.
  • Computing and allocating qualified business income for trusts, estates, and beneficiaries.

In addition to the proposed regulations, the IRS also issued Notice 2018-643 containing a proposed revenue procedure for calculating W-2 wages for purposes of Section 199A. The proposed revenue procedure provides three methods for calculating W-2 wages, largely based upon methods used for calculating wages under former Section 199 (the qualified domestic production activities deduction) which was repealed by the Tax Cuts and Jobs Act.

The proposed regulations also shut down a few strategies that have surfaced since the enactment of Section 199A.  For example, because the threshold amount of taxable income with respect to trusts is calculated at the trust level, the proposed regulations prevent taxpayers from dividing trust assets into multiple trusts to avoid reaching the threshold and consequently being subject to the deduction limitations.  Also, the proposed regulations limit the “crack-and-pack” strategy of separating out the service parts of a business so that the remainder of the business can qualify for the deduction. 

For questions or more information, please contact Katherine E. David, Chris Harris, Joshua Wu, Kenneth S. Wear, Christine M. Green or another member of Clark Hill's Tax and Estate Planning Business Unit or Corporate Business Unit.

1 Unless otherwise provided, all “Section” references are to the Internal Revenue Code of 1986, as amended.

2 REG-107892-18, available online at

3 Notice 2018-64, available online at