According to the IRS, on the 20% QBI deduction:

If you're a non-service provider and your taxable income is $100,000 or more above the income threshold if married filing jointly, or $50,000 if single, your pass-through deduction is fully subject to a W-2 wage/business property limitation.

Thus, if you're married filing jointly, this limitation applies if your taxable income is over $429,800 ($214,900 if you're single). Your maximum possible pass-through deduction is 20% of your QBI, just like at the lower income levels. However, when your income is this high your deduction is further limited to the greater of:

  • 50% of your share W-2 employee wages paid by the business, or
  • 25% of W-2 wages PLUS 2.5% of the acquisition cost of your depreciable business property

Two questions:

#1 - Does this $214,900 limit pertain to the individual's income from ALL sources (so if they also have W-2 income not from this business, that W-2 income can exclude them from any QBI deduction), or does the limit only pertain to income from the business?

#2 - Does this mean that a sole proprietor who makes >$214,900 from their business cannot take any QBI deduction, but an S-Corp which pays an owner on a W-2 would be allowed to deduct up to 50% of those wages?

Question sparked by reading this Wolkers Kluwer Article:

Another possible advantage comes from the Tax Cuts and Jobs Act. That tax reform bill gives pass-through entities a 20% “qualified business income “ deduction.

However, businesses with taxable income above a certain amount don’t qualify unless they pay employee wages. Therefore, under some circumstances S corporation taxation can help an LLC qualify for the deduction.


2 Answers 2


QBI is defined in the IRC Sec. 199A. As I mentioned in my comments to another of your questions, this has nothing to do with S-Corporation, QBI treatment is available for any trade or business income regardless of the legal/tax entity.

To your questions:

Does this $214,900 limit pertain to the individual's income from ALL sources...?

This applies to your taxable income before the QBI deduction. I.e.: what's on your 1040 line 15 (as of year 2021) before any calculations made for line 13 (where the QBI deduction flows). It does include income from all sources, and your itemized/standard deduction.

Does this mean that a sole proprietor who makes >$214,900 from their business cannot take any QBI deduction, but an S-Corp which pays an owner on a W-2 would be allowed to deduct up to %50 of those wages?

No. S-Corp doesn't deduct anything, since it's a disregarded entity. However the preferential treatment of W2 income is limited based on your overall income. For a sole proprietor, QBI income is calculated based on the Schedule C income, see the instructions here.

Note that reasonable compensation paid by S-Corporation is not qualified for QBI. See instructions here.

To figure the total amount of QBI, you must consider all items that are attributable to the trade or business. This includes, but isn’t limited to, unreimbursed partnership expenses, business interest expense, deductible part of self-employment tax, self-employment health insurance deduction, and contributions to qualified retirement plans. QBI doesn’t include any of the following:

  • Items that aren’t properly includible in income.
  • Income that isn’t effectively connected with the conduct of a trade or business within the United States (go to IRS.gov/ECI).
  • Wage income (except “Statutory Employees” whereForm W-2, box 13, is checked).
  • Amounts received as reasonable compensation from an S corporation.
  • Amounts received as guaranteed payments.
  • Amounts received as payments by a partner for services other than in a capacity as a partner.
  • Items treated as capital gains or losses under any provision of the Code.
  • Dividends and dividend equivalents.
  • Interest income not properly allocable to a trade or business.
  • Commodities transactions or foreign currency gains or losses.
  • Income, loss, or deductions from notional principal contracts.
  • Annuities (unless received in connection with the trade or business).
  • Qualified REIT dividends.
  • Qualified PTP income.

SSTBs are also excluded from QBI treatment, depending on the nature of your business it may affect you.

At a risk of sounding like a broken record - find a proper licensed tax adviser, EA or CPA licensed in your State.


Found a helpful answer here which gives a clear example. For more detailed examples see the linked article, which is a bit lengthy, but actually quite good, and also points out some places where this new-ish law falls short and may be amended in the future.

The W-2 limitations are phased in over the next $100,000 of taxable income (if married filing jointly; $50,000 for all other taxpayers).48 Thus, once taxable income reaches $415,000 for a married taxpayer filing jointly ($207,500 for all other taxpayers), the W-2 limitations apply in full.

Example 11: A is a sole proprietor. During 2018, the business generates $400,000 of qualified business income, pays $120,000 of W-2 wages, and has $100,000 of qualified property. A files jointly with his spouse for 2018, and their combined taxable income for the year, including the qualified business income, is $600,000.

A's tentative deduction is $80,000 ($400,000 × 20%). Because A's taxable income for 2018 is greater than $415,000, however, the W-2 limitations apply in full. As a result, A's deduction is limited to the greater of:

  • 50% of W-2 wages = $60,000; or
  • 25% of W-2 wages ($30,000) plus 2.5% of unadjusted basis of qualified property ($2,500) = $32,500.

Thus, A is entitled to a $60,000 deduction in 2018.


Inclusion of owner's compensation in qualified business income

Making matters worse, contrary to the preceding example, a shareholder of an S corporation is disadvantaged relative to a sole proprietor when the owner's taxable income is below the threshold at which the W-2 limitations apply. This is because Sec. 199A provides that qualified business income does not include reasonable compensation paid to a shareholder in an S corporation or guaranteed payments made to a partner in a partnership. Consider the following example:

  • Example 19: Assume the same facts as in the previous two examples, except the income earned in each business is $150,000 rather than $500,000. Assume further that both A and B have taxable income below the $315,000/$157,500 thresholds.

A, the sole proprietor, is entitled to a deduction of $30,000 (20% of $150,000). B, the sole shareholder of the S corporation, remains required to pay himself reasonable compensation. Assume he is paid W-2 wages of $70,000. This reduces the qualified business income B receives from the S corporation to $80,000 and in turn reduces B's Sec. 199A deduction to $16,000.

Thus, when income is below the threshold, the reasonable-compensation requirement works against the shareholder in the S corporation, reducing both his qualified business income and Sec. 199A deduction. A, the sole proprietor, has no such requirement and thus preserves the full amount of his qualified business income, giving him a deduction of $30,000, when his S corporation shareholder counterpart receives a deduction of only $16,000.

The results reflected in Examples 17 through 19 are problematic; similarly situated taxpayers should generally enjoy similar federal income tax consequences. But by virtue of two pieces of Sec. 199A — the inclusion of wages paid to an owner in the W-2 limitation and the exclusion from qualified business income of reasonable compensation and guaranteed payments paid to an owner — inequities arise at all income levels.

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