Section 199A and You
What if one retirement-plan contribution could do more than defer tax? For some high-income service-business owners, it can also restore part of a deduction their income had begun to phase out.
Sam is Looking for More Ways to Lower his Taxes
Sam followed his accountant's advice and elected S corporation treatment. That reduced his combined federal taxes by $9,245. Now his financial planner is telling him that with planning, he could recover a significant deduction he is foregoing.
Sam Is Leaving Thousands of his QBI Deduction on the Table
The Qualified Business Income (QBI) deduction was intended to be the big break for small business owners. Created in 2017, expanded and made permanent in 2025, it provides a deduction up to 20% of qualified business income for small business owners filing as pass through entities.
Based on Sam's qualified business income, the starting point would be a $61,132 deduction. Instead, he only reported $32,620. What happened?
A Specified Service Trade or Business (SSTB)
Because Sam provides legal services, his business is a Specified Service Trade or Business (SSTB). That means his QBI deduction is subject to an income test.
Married Filing Jointly
Taxable Income Before the QBI DeductionSingle
Taxable Income Before the QBI DeductionSam's taxable income of $473,461 is well above the $403,500 threshold for a full deduction. That places him in the Partial Deduction range, reducing his QBI deduction to $32,620.
A Qualified Retirement Plan Can Help Restore the Deduction
In order to lower his taxable income, Sam can utilize a Qualified Retirement Plan (QRP). By lessening his taxable income, it greatly increases his QBI Deduction for this tax year.
Before Planning
- Initial Taxable Income
- $473,461
- Elective Deferrals and Employer Contributions
- $0
- Taxable Income Before the QBI Deduction
- $473,461
- SSTB Phaseout Percentage
- 46.64%
- QBI Deduction
- $32,620
After Planning
- Initial Taxable Income
- $473,461
- Elective Deferrals and Employer Contributions
- ($72,000)
- Taxable Income Before the QBI Deduction
- $401,461
- SSTB Phaseout Percentage
- 0%
- QBI Deduction
- $51,632
The combined $72,000 Elective Deferral and Employer Contribution lowers Sam's Taxable Income before the QBI Deduction from $473,461 to $401,461, bringing him fully below the SSTB threshold. That's great! However, the Employer Contribution also reduces his Qualified Business Income. As a result, his maximum potential QBI Deduction falls from $61,132 to $51,632. However, a QBI Deduction of $51,632 is far better than his starting point of $32,620.
This Is More Than Tax Deferral
The Qualified Retirement Plan contribution greatly increases the QBI Deduction, which further helps lower the marginal tax bracket, resulting in a $24,826 reduction in combined federal taxes.
Before Planning
$122,659Combined Federal Taxes- 32%
- Federal Income Tax Bracket
- $32,620
- QBI Deduction
After Planning
$97,833Combined Federal Taxes- 24%
- Federal Income Tax Bracket
- $51,632
- QBI Deduction
Here we see the benefit of Comprehensive Planning. More than Tax Planning, more than Financial Planning, Comprehensive Planning focuses a multi-disciplinary team of advisors on providing the best result for clients like you.
In the case of Sam Houston, this results in a $24,826 reduction in what Sam pays the federal government for this tax year. Approximately $4,563 of that reduction comes from increasing his QBI Deduction, while the rest came from his Qualified Retirement Plan.
Details behind the Illustrations
These supporting details are available for readers who want to examine the assumptions, SSTB classification, and source material behind Sam's continuation.
Methodology & Limits
- This page continues the S corporation example: Sam is a contract attorney, age 52, filing jointly with no other material household income, net capital gain, or itemized deductions.
- The $520,000 business-income figure is measured before Sam's $200,000 S corporation wage and $14,339 of employer Social Security and Medicare taxes.
- The calculation uses the 2026 $403,500 MFJ Section 199A threshold, the $553,500 end of the SSTB phase-in range, and the $32,200 standard deduction.
- The $200,000 W-2 wage is an assumption, not a reasonable-compensation opinion. An actual compensation analysis could produce a different wage and tax result.
- The illustration uses a $24,500 employee deferral plus a $47,500 employer contribution for Sam. No catch-up contribution is included. Eligibility, plan documents, compensation, and participation can change the result.
- The before-planning QBI deduction applies the SSTB applicable percentage. The after-planning deduction uses Sam's remaining QBI after the employer contribution. Displayed amounts are rounded; calculations use unrounded figures.
Who is an SSTB?
The IRS identifies specific service fields and financial-market activities.
A narrower rule also covers certain income from endorsements, licensing a person's identity, and appearances at events or in media.
- Health
- Law
- Accounting
- Actuarial Science
- Performing Arts
- Consulting
- Athletics
- Financial Services
- Brokerage Services
- Investing & Investment Management
- Trading
- Dealing in Securities, Partnership Interests, or Commodities
Disclaimer
This article is educational and uses fictitious facts. It is not individual tax, legal, accounting, actuarial, or investment advice. Retirement-plan deductions and Section 199A eligibility should be coordinated with a certified public accountant (CPA), attorney, plan administrator, and actuary as appropriate.
Is your income sitting just beyond a tax-planning threshold?
We can help frame the retirement-plan questions to discuss with your tax professional and plan specialists.