Tax code Section 199A gives you a 20 percent tax deduction if you have

pass-through business income (such as from a proprietorship, a partnership, or an S corporation), and

2026 taxable income of $403,500 or less (married, filing jointly) or $201,750 or less (filing as single or head of household).

But once your taxable income is greater than the amounts mentioned above (which Section 199A calls “thresholds”), your Section 199A tax deduction becomes more complicated.

Under the rules that apply to the Section 199A tax deduction, the tax code creates two types of businesses:

Businesses that are in favor and can realize the deduction regardless of taxable income.

Businesses that are out of favor. The tax code calls the out-of-favor business a “specified service trade or business” (SSTB).

If you own an out-of-favor SSTB, you suffer a zero (yep, zero) Section 199A tax deduction on that business’s out-of-favor income when you have 1040 taxable income greater than $553,500 (married, filing jointly) or $276,750 (single or head of household).

Yes, still zero. The One Big Beautiful Bill Act (OBBBA) added a $400 minimum Section 199A deduction beginning in 2026.1

It applies below the thresholds when you have at least $1,000 of qualified business income from an in-favor or out-of-favor trade or business in which you materially participate.

It applies to an in-favor business that’s above the phase out.

It does not apply to a out-of-favor SSTB that’s above the phaseout/phase in.

This is one more reason to care about the de minimis rules described later in this article. Carve out a genuine in-favor business, and you have qualified business income again, which puts the $400 minimum back on the table along with the real deduction on the in-favor income.

With taxable income greater than the $403,500/$201,750 thresholds and less than the $553,500/$276,750 upper limits, Section 199A reduces the tax deduction available to your out-of-favor SSTB.

Good news in that band. The OBBBA widened the phase-in range by 50 percent, from $50,000 to $75,000 above the threshold for single filers and from $100,000 to $150,000 for married filers, beginning in 2026.2 If you own an SSTB, that wider band is where a partial deduction lives, and it is 50 percent greater than it was.

And it is permanent. Section 199A was scheduled to expire after 2025. The OBBBA repealed the sunset, so the planning in this article pays off every year, not just this one time.3

One technical point for 2026: you compute taxable income for Section 199A purposes without regard to the new limitation on itemized deductions.4

This brings us to the questions that are answered in this article:

What if your taxable income is above the limits, but your pass-through business has one part that’s out of favor and another part that’s in favor? You will like what the rules have done for you in this situation.

What service business gives the “big picture” of how the out-of-favor SSTB definitions work? Answer: consulting. We will dive into the rules that apply to consulting, because almost any business could have some consulting activity. ... Log in to view full article.