{"id":6351,"date":"2018-01-13T10:25:02","date_gmt":"2018-01-13T18:25:02","guid":{"rendered":"http:\/\/evergreensmallbusiness.com\/?p=6351"},"modified":"2025-06-23T11:31:25","modified_gmt":"2025-06-23T18:31:25","slug":"sec-199a-deduction-phase-calculations","status":"publish","type":"post","link":"https:\/\/evergreensmallbusiness.com\/sec-199a-deduction-phase-calculations\/","title":{"rendered":"Section 199A Deduction Phase-out Calculations"},"content":{"rendered":"

\"The<\/a><\/p>\n

The Section 199A deduction phase-out calculations confuse lots of people. They even confuse smart accountants, as several readers of my Maximizing Section 199A Deductions monograph<\/a> have told me.<\/p>\n

Accordingly, I want to give a high-level overview of how the phase-out math works, including a quick review how the deduction works.<\/p>\n

And one other note before we start: This blog post’s information has been updated for the 2025 Section 199A phase out amounts.<\/p>\n

Section 199A Deduction in a Nutshell<\/h2>\n

The Section 199A deduction gives unincorporated businesses, S corporations and real estate investors a special \u201cbonus\u201d deduction equal to, tentatively, the lesser of 20 percent of business income or 20 percent of their taxable ordinary income.<\/p>\n

For example, say you make $100,000 a year in an incorporated business but with the new standard deduction your taxable income equals $76,000. Assume all your taxable income is ordinary income, so no capital gains or anything.<\/p>\n

In this case your Section 199A deduction equals the lesser of 20% of $100,000, which equals $20,000… or 20% of $76,000, which equals $15,200.<\/p>\n

That means your deduction equals $15,200.<\/p>\n

Section 199A Deduction Phase-out Calculations Usually Don\u2019t Matter<\/h2>\n

The good news…<\/p>\n

For most business owners and investors, the Section 199A Deduction phase-out calculations don\u2019t matter.<\/p>\n

For example, single taxpayers with taxable income less than $197,300 and married taxpayers with taxable income less than $394,600? Those folks don\u2019t get \u201cphased-out.\u201d They can ignore this phase-out nonsense.<\/p>\n

Further, single taxpayers making more than $247,300 and married taxpayers making more than $494,600 also don\u2019t need to worry about the phase-out calculations.<\/p>\n

Instead, taxpayers earning above these $247,300 and $494,600 taxable income thresholds apply a couple of simple rules:<\/p>\n

Rule #1: High-income Service Businesses Disqualified<\/h3>\n

If the taxpayer earns her or business income in a specified service business\u2014basically a white-collar professional, athlete, performer or one-person celebrity business\u2014she or he doesn\u2019t get the Section 199A deduction.<\/p>\n

Another way to say this same thing? For high income specified service business income, the Section 199A deduction equals zero.<\/p>\n

That’s a pretty easy\u2014if an unpleasant\u2014rule.<\/p>\n

Caution:<\/strong> One semi-surprise that came into focus in the final regulations bears mentioning here. If your trade or business includes a little bit of “specified service” activity, that can “taint” your entire business as a “specified service.” The final regulations, as one example, describe a landscaping business that also provides some “consulting.” “Consulting” counts as a specified service. And if a small firm’s specified service activities equal 10 percent or more of revenues, the entire business counts as a “specified service” and so loses its Section 199A deduction.<\/p>\n

Rule #2: High-income Taxpayers Need Wages and Property<\/h3>\n

And then a second and more complicated rule for these high income taxpayers…<\/p>\n

The taxpayer\u2019s Section 199A deduction can\u2019t be more than either 50% of the business\u2019s W-2 wages or 25% of the business\u2019s W-2 wages plus 2.5 percent of the business\u2019s depreciable property.<\/p>\n

Suppose, for example, that a business pays $100,000 in\u00a0 wages and holds $2,000,000 in depreciable property.<\/p>\n

In this case, the business calculates what amount equals 50% of its W-2 wages (that value is $50,000) and what amount equals 25% of its W-2 wages plus 2.5% of its depreciable property (that value is $75,000).<\/p>\n

Whichever value is more\u2014$75,000 in this case\u2014the Section 199A deduction can’t be\u00a0 bigger than that.<\/p>\n

A little bit of math, sure. But pretty easy to understand and even to calculate.<\/p>\n

Unfortunately, things get tricky for taxpayers with taxable incomes that fall into the phase-out ranges (again, that’s between $197,300 and $247,300 for single taxpayers and between $394,600 and $484,600 for married taxpayers.) And we need to talk about that next. Two phase-outs appear in the Section 199A law.<\/p>\n

Section 199A Deduction Phase-out Calculations for Specified Service Trades or Businesses<\/h2>\n

For specified service trades or businesses, the first phase-out works like this: At the start of the phase-out range (so either $197,300 or $394,600) the taxpayer or taxpayers get a deduction equal to the full 20% of the business income.<\/p>\n

At the end of the phase-out range, the taxpayer gets a deduction equal to 0% of the business income.<\/p>\n

And as a taxpayer\u2019s taxable income \u201cslides\u201d from the threshold amount up through the phase-out range, the percentage proportionally \u201cslides\u201d down to zero.<\/p>\n

The actual law doesn\u2019t put the formula into a table, but if it did, the table would look something like what appears below:<\/p>\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n
Deduction %<\/th>\nSingle<\/th>\nMarried<\/th>\n<\/tr>\n
20%<\/td>\n$197,300<\/td>\n$394,600<\/td>\n<\/tr>\n
18%<\/td>\n$202,300<\/td>\n$404,600<\/td>\n<\/tr>\n
16%<\/td>\n$207,300<\/td>\n$414,600<\/td>\n<\/tr>\n
14%<\/td>\n$212,300<\/td>\n$424,600<\/td>\n<\/tr>\n
12%<\/td>\n$217,300<\/td>\n$434,600<\/td>\n<\/tr>\n
10%<\/td>\n$222,300<\/td>\n$444,600<\/td>\n<\/tr>\n
8%<\/td>\n$227,300<\/td>\n$454,600<\/td>\n<\/tr>\n
6%<\/td>\n$232,300<\/td>\n$464,600<\/td>\n<\/tr>\n
4%<\/td>\n$237,300<\/td>\n$474,600<\/td>\n<\/tr>\n
2%<\/td>\n$242,300<\/td>\n$484,600<\/td>\n<\/tr>\n
0%<\/td>\n$247,300<\/td>\n$494,600<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

You see what I mean by the percentage \u201csliding down\u201d from 20% to 0%, right?<\/p>\n

At $197,300 if single or $394,600 if married, someone gets the full 20% deduction. At $247,300 if single or $494,600 if married, someone gets zero deduction.<\/p>\n

Note that $222,300 taxable income for a single person and $444,600 in taxable income\u00a0 for a married person sits exactly half way through the phase-out range. So at that income level, the 20% deduction gets \u201chalf\u201d phased out, and equals 10%.<\/p>\n

Section 199A Deduction Phase-out Calculations for Low W-2 Wages or Depreciable Property<\/h2>\n

A second phase-out looks at a firm’s W-2 wages and depreciable property. Specifically, low or zero W-2 wages or depreciable property also cause a single taxpayer with income between $197,300 and $247,300 or a married taxpayer with income between $394,600 and $494,600 to lose a chunk of the Section 199A deduction.<\/p>\n

\"Cover<\/a>
Developing your Section 199A expertise? Consider our best-selling e-book.<\/a> Instant download. Money back guarantee.<\/figcaption><\/figure>\n

The calculations get a little more complicated. Unfortunately. But if you break down the calculations into half a dozen simple steps, the math makes sense.<\/p>\n

Let me step you through how this works.<\/p>\n

Step 1: Calculate the tentative “20%” deduction.<\/h4>\n

For example, if the business income equals $400,000, 20% of that equals $80,000. So that $80,000 potentially<\/em> equals the tentative Section 199A deduction amount.<\/p>\n

Step 2: Calculate the W-2 Wages or Depreciable Property Limitation.<\/h4>\n

For example, if the business paid $100,000 of wages and had zero depreciable property, the 50% of W-2 wages limitation amount equals $50,000.<\/p>\n

Step 3: Calculate the difference between the tentative deduction and limitation<\/h4>\n

For example, if the tentative Section 199A deduction equals $80,000 but the W-2 limitation equals $50,000, the difference between the two amounts equals $30,000.<\/p>\n

Step 4: Calculate Phase-out Percentage<\/h4>\n

Next you need to calculate the percentage that describes how far into the phase-out range a taxpayer\u2019s taxable income is.<\/p>\n

Let’s call this value the \u201cphase-out percentage.\u201d<\/p>\n

If a married taxpayer\u2019s taxable income equals $489,600, for example, the couple\u2019s income is $95,000\/$100,000ths, or 95%, into the $100,000 phase-out range that goes from $394,600 to $494,600.<\/p>\n

Step 5: Calculate Phase-out Amount<\/h4>\n

To calculate the phase-out amount the taxpayer loses, you need to multiply the phase-out percentage (calculated in step 4) by the difference between the tentative deduction and the limitation (calculated in step 3.)<\/p>\n

For example, if the phase-out percentage equals 95% and the difference between the tentative deduction and the limitation equals $30,000, the phase-out amount equals $28,500.<\/p>\n

Step 6: Deduct the Phase-out Amount from Tentative Deduction<\/h4>\n

To finally calculate the real final deduction, you subtract the phase-out amount (calculated in step 5) from the tentative deduction amount (calculated in step 1).<\/p>\n

If the tentative deduction equals $80,000 for example and the phase-out amount equals $28,500, the real Sec. 199A deduction equals $51,500.<\/p>\n

Double Phase-outs Really Hurt<\/h2>\n

One clarification some folks have gotten confused about, too.<\/p>\n

Someone can lose some of the Section 199A deduction due to being in a specified service trade or business. And someone can lose some of the Section 199A deduction due having a high income but not enough W-2 wages or depreciable property in the business. And these two phase-outs can both<\/em> grind down the ultimate Section 199A deduction someone gets.<\/p>\n

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Optimizing wages for Section 199A? Use our e-book.<\/a> Instant download. Money back guarantee. Free updates.<\/figcaption><\/figure>\n

In other words, say someone enjoys a taxable income half way through the phase-out range–so at $222,300 for a single taxpayer.<\/p>\n

If this person earned their income in a specified service trade or business, they would lose half their Section 199A deduction due to the specified service trade or business thing.<\/p>\n

And then they could lose another chunk of that remaining half due to the W-2 wages and depreciable property limitation.<\/p>\n

Closing Remarks<\/h2>\n

Once you grind through the math, the phase-out calculations make sense. The math works the way you and I would predict if we were just “guessing.”<\/p>\n

Two other things to keep in mind though, since you’ve trudged through this discussion.<\/p>\n

First, the Section 199A law says those threshold amounts, $197,300 and $394,600, do need to be adjusted for inflation. So you want to keep that in mind. Also note that the $50,000 “phase-out range” for single people and the $100,000 “phase-out range” for married people do not<\/em> get adjusted for inflation. Just so you know…<\/p>\n

Second, let me mention again the rule that your Section 199A deduction can’t be more than 20% of taxable income taxed as ordinary income. The amount calculated using the phase-out arithmetic may be further limited to that value.<\/p>\n

Other Resources You Might Find Useful<\/h2>\n

The Section 199A deduction interacts with the optimal S corporation salary for shareholder-employees, so if you’re ready to think about that issue, maybe peek at this blog post:\u00a0S Corporation Shareholder Salaries and the Section 199A Deduction<\/a><\/p>\n

Determining whether a one-person business gets disqualified as a “specified service trade or business” is tricky, but I’ve got some additional information about that riddle here: Section 199A Pass-thru Entity Deduction and the Principal Asset Disqualification<\/a>.<\/p>\n

Finally, if you’re still learning the law, you may benefit by reading our blog’s Sec. 199A “primer” (available here:\u00a0Pass-thru Income Deduction: Top 12 Things Every Business Must Know<\/a>) and then skimming through the dozens of reader comments, questions and answers.<\/p>\n

Interested in Section 199A? Subscribe to our free mailing list<\/h2>\n

We regularly blog about the small business tax laws including the new Section 199A deduction. You may want to consider subscribing to our free monthly-ish newsletter. You can subscribe anytime.
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