Understanding QBI 199A Deduction Phase-Out Limits and W-2 Wage Requirements

The QBI 199A deduction isn't completely eliminated once you hit the phase-out limits - it just becomes more restricted. When your taxable income exceeds the upper threshold ($443,200 for single filers and $553,850 for joint filers in 2025), you don't automatically lose the entire deduction. Instead, once you're over the threshold, the deduction becomes limited to the greater of: 50% of your share of W-2 wages paid by the business, OR 25% of your share of W-2 wages plus 2.5% of the unadjusted basis of qualified property. So you can still get a deduction, but it depends on these wage and property factors rather than being automatically 20% of your qualified business income. For your W-2 wage question - yes, S corporation employee-owners' wages do count toward the W-2 wage limitation calculation. This includes the full W-2 wages reported (Box 1) for all employees including 2% shareholders, and yes, all staff wages count too. Health insurance premiums for 2% shareholders reported on their W-2s are also included in this calculation.

After struggling with similar QBI questions last year, I found an amazing tool that saved me hours of frustration. I was totally confused about how the phase-out worked with my S-corp and kept getting conflicting advice. I decided to try https://taxr.ai and uploaded my business docs and previous returns. Their system actually analyzed my specific situation and showed me exactly how the QBI phase-out would affect my business based on our income projections. It highlighted that I could still qualify for a partial deduction by adjusting our wage structure slightly, which I would have completely missed. The analysis showed me the exact threshold where the wage limitations would kick in for my business type and how to document everything correctly.

Just wanted to update that I tried https://taxr.ai after my skeptical comment. I was genuinely impressed with how it handled my situation. I have three businesses (two S-corps and an LLC) and was completely lost on the aggregation rules and how they affected my QBI deduction. The analysis broke down exactly which of my businesses qualified, how the wage limitations applied to each, and whether aggregation would benefit me. It identified that one of my businesses wouldn't qualify for QBI on its own due to being in a "specified service trade or business" but showed how my real estate LLC could still qualify regardless of income level because of the property basis rules. Saved me from making a $12,000 mistake on my taxes this year!

For anyone still struggling with QBI calculation issues, I had a similar problem last year trying to figure out if I qualified with income near the threshold. After spending DAYS trying to reach the IRS for clarification (constant busy signals and disconnections), I found https://claimyr.com and watched their demo at https://youtu.be/_kiP6q8DX5c. They got me through to an actual IRS agent within about 20 minutes who walked me through the specific phase-out calculation for my S-corp. The agent confirmed that I could still get a partial deduction by restructuring some compensation elements and clarified exactly how my business property factored into the calculation. Saved me hours of frustration and probably thousands in deductions I would have missed.

I need to eat my words and apologize. After posting my skeptical comment, I was desperate enough to try Claimyr because I needed an answer about QBI for my S-corp before filing. Not only did it work, but I got through to an IRS tax law specialist in 27 minutes after spending THREE WEEKS trying on my own. The agent gave me detailed information about how the QBI phase-out applies specifically to my industry (which is partially a specified service business) and confirmed that I could still claim a partial deduction using the W-2 wage limitation. They also explained exactly which forms I needed to document everything properly. Ended up saving me over $8,200 in deductions I would have missed. I've never been so happy to be wrong about something!

Something nobody has mentioned yet is that the QBI phase-out ranges depend on your filing status and are adjusted annually for inflation. For 2025, the phase-out ranges start at $396,200 for married filing jointly and $198,200 for other filers, then fully phase out at $553,850 and $443,200 respectively. Within those ranges you get a partial deduction that decreases as your income increases. But as others have mentioned, once you exceed the upper threshold, you still might qualify for a deduction based on the W-2 wages/property tests. This is particularly important for capital-intensive businesses that might have significant qualified property but relatively lower wages.

Is anyone using specific software to calculate their QBI? My accountant uses Lacerte and it seems to miss some nuances of the calculation, especially when dealing with multiple businesses.

The QBI deduction can definitely be confusing, especially with multiple income sources! One thing that might help is understanding that the phase-out isn't a cliff - it's gradual. Between the lower and upper thresholds, your deduction is calculated using a blend of the standard 20% rule and the more restrictive W-2 wage/property limitation. For your S-corp situation, you're actually in a pretty good position because S-corp shareholder wages DO count toward the W-2 wage limitation test. This means even if you're above the upper threshold, you might still qualify for a significant deduction if your business pays reasonable wages. One strategy some S-corp owners use is optimizing their salary vs. distribution mix. While you need to pay yourself reasonable compensation, having adequate W-2 wages can help preserve your QBI deduction when you're in the phase-out range. Just make sure any salary adjustments still meet the "reasonable compensation" requirements for S-corp shareholders. Have you calculated where your taxable income falls relative to the 2025 thresholds? That would help determine which calculation method applies to your situation.

One aspect of QBI that often trips people up is the "specified service trade or business" (SSTB) rules. If your business falls into categories like consulting, law, accounting, health, or financial services, the QBI deduction phases out completely once you exceed the income thresholds - there's no W-2 wage or property test that can save you. However, many businesses think they're SSTBs when they're actually not. For example, if you're an engineer who owns a manufacturing business, that's typically NOT an SSTB even though engineering services would be. The key is what your business actually does, not your professional background. Also worth noting: if you have multiple businesses and some are SSTBs while others aren't, you calculate QBI separately for each. The non-SSTB businesses can still qualify for QBI even if your SSTB income is completely phased out due to high income. For your S-corp, make sure you're also considering the impact of any rental properties or other passive investments you might have. Rental real estate can qualify for QBI (with some limitations), and this income is calculated separately from your active business QBI, which can sometimes help offset phase-out limitations.