Advising Domestic Business Ventures: Section 199A and Flow-Through Structures

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Jason B. Freeman

Jason B. Freeman

Managing Member


Mr. Freeman is the founding member of Freeman Law, PLLC. He is a dual-credentialed attorney-CPA, author, law professor, and trial attorney.

Mr. Freeman has been named by Chambers & Partners as among the leading tax and litigation attorneys in the United States and to U.S. News and World Report’s Best Lawyers in America list. He is a former recipient of the American Bar Association’s “On the Rise – Top 40 Young Lawyers” in America award. Mr. Freeman was named the “Leading Tax Controversy Litigation Attorney of the Year” for the State of Texas for 2019 and 2020 by AI.

Mr. Freeman has been recognized multiple times by D Magazine, a D Magazine Partner service, as one of the Best Lawyers in Dallas, and as a Super Lawyer by Super Lawyers, a Thomson Reuters service. He has previously been recognized by Super Lawyers as a Top 100 Up-And-Coming Attorney in Texas.

Mr. Freeman currently serves as the chairman of the Texas Society of CPAs (TXCPA). He is a former chairman of the Dallas Society of CPAs (TXCPA-Dallas). Mr. Freeman also served multiple terms as the President of the North Texas chapter of the American Academy of Attorney-CPAs. He has been previously recognized as the Young CPA of the Year in the State of Texas (an award given to only one CPA in the state of Texas under 40).

Freeman Law advises domestic and international ventures with corporate and tax compliance.  Clients with flow-through entity structures may need to consider the impact of section 199A.  Planning for section 199A may significantly impact a client’s bottom line and investor returns.  For more on section 199A, see our other Insights, such as A Practical Roadmap Through Section 199AChoice of Entity After Tax Reform, and Tax Reform is Here: A Brief Primer on the Key Business Provisions.


Section 199A was enacted as part of the Tax Cuts and Jobs Acts of 2017, P.L. 115-97 (the “TCJA”).  Its rules are currently effective for tax years beginning after 2017 and before 2026.

Section 199A provides a deduction of up to 20 percent of income from a domestic business that operates as a sole proprietorship or through a partnership, S corporation, trust, or estate.  The deduction is available to individuals and some estates and trusts.  It is not available for wage income or for business income earned through a C corporation.

For taxpayers with taxable income that exceeds a threshold amount,[1] their section 199A deduction may be limited based on (i) the type of trade or business that they are engaged in, (ii) the amount of W-2 wages paid with respect to the trade or business, and/or (iii) the unadjusted basis immediately after acquisition (“UBIA”) of qualified property held for use in the trade or business.[2]

Notably, the deduction under section 199A does not reduce net earnings from self-employment under section 1402 or net investment income under section 1411. Therefore, taxpayers should be aware that sections 1402 and 1411 continue to be calculated as though there is no section 199A deduction.

The Deduction

A qualifying taxpayer with income attributable to one or more qualifying domestic trades or businesses with taxable income equal to or less than the threshold amount may take a section 199A deduction equal to the lesser of: (i) 20 percent of the QBI from the individual’s trades or businesses plus 20 percent of the individual’s combined qualified REIT dividends and qualified PTP income or (ii) 20 percent of the excess (if any) of the individual’s taxable income over the individual’s net capital gain.

QBI is subject to limitations for taxpayers with taxable income exceeding the threshold amount. These limitations include the exclusion or reduction of items from a specified service trade or business (“SSTB”), as well as limitations based on the W-2 wages of the trade or business or a combination of the W-2 wages and the UBIA of qualified property.

The Limitations

Taxpayers must compare, on a trade-or-business by trade-or-business basis, 20% of each trade or business’ QBI against the alternative limitation that applies to that trade or business.  That limitation (again, for each trade or business) is the greater of (1) 50 percent of the W-2 wages attributable to the trade or business or (2) 25 percent of those W-2 wages plus 2.5 percent of the UBIA of qualified property for that trade or business. Thus, the QBI for each trade or business is equal to the lesser of 20% of the QBI for that trade or business or the applicable limitation. Special rules apply where the taxpayer’s taxable income is within the phase-in range.

Specified Service Trade or Business (“SSTB”)

Under the proposed regulations, if a trade or business is a SSTB, then no QBI, W-2 wages, or UBIA of qualified property from the SSTB may be taken into account by any taxpayer whose taxable income exceeds the phase-in range (defined in Proposed §1.199A- 1(b)(3)), even if the item is derived from an activity that is not itself a specified service activity. A phase-in rule, provided in Proposed §1.199A-1(d)(2), applies to individuals with taxable income within the phase-in range, allowing them to take into account a certain “applicable percentage” of QBI, W-2 wages, and UBIA of qualified property from an SSTB. If the taxpayer’s taxable income is above the phase-in range, then no amount of QBI, W-2 wages, or UBIA of qualified property from an SSTB can be used by the taxpayer in calculating their section 199A deduction.

A specified service trade or business includes any trade or business involving the performance of services in one or more of the following fields:

Performing Services as an Employee:  Note that the trade or business of performing services as an employee is not a trade or business for purposes of section 199A. Therefore, no items of income, gain, loss, or deduction from the trade or business of performing services as an employee constitute QBI within the meaning of section 199A.

Trade or Business

Proposed Regulations at §1.199A-1(b) define the phrase trade or business for purposes of section 199A.  Under that proposed regulation, the IRS generally determined that the phrase trade or business should take on the meaning of that phrase that has been developed under section 162(a) of the Code.  Section 162(a) lends the benefits of a large body of existing case law and administrative guidance interpreting the phrase across a wide variety of industries.

Qualified Business Income (“QBI”)

Qualified Business Income (“QBI”) is defined as the net amount of qualified items of income, gain, deduction, and loss with respect to any trade or business of the taxpayer.  See our upcoming Insights on the topic for more on QBI.


[1]That threshold amount is equal to $157,500 (or $315,000 in the case of a taxpayer filing a joint return).

[2]Deductions related to combined qualified real estate investment trust (“REIT”) dividends and qualified publicly traded partnership (“PTP”) income are not subject to the W-2 wages or UZBIA of qualified property limitations.