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 reopen the door to a deduction they had completely lost.
Meet Dr. Anson Jones
In this case study, Dr. Jones owns and operates his private medical practice as an S corporation. He is very successful, but, like most business owners, feels he is getting killed on taxes. Where did things go wrong?
Dr. Jones Reported $0 on Line 13a.
The Qualified Business Income (QBI) deduction was intended to be the big break for small business owners. A brand new 20% deduction of their business income. Created in 2017, made permanent in 2025. For Dr. Ansom, that would be an $82,000 deduction from taxable income! So why did his tax professional put $0 instead? Because it has a catch.
If the reputation or skill of one or more employees or owners is its principal asset, your business is likely a Specified Service Trade or Business (SSTB), and your 20% deduction now has to undergo an income test. If Dr. Ansom owned a construction business instead of a medical practice, for example, this wouldn't have happened.
Should Dr. Jones hang up his stethoscope and put on a hard hat then? Probably not. It's not easy to build a $1,000,000 business. More so, with a better understanding of QBI and proper planning, he can recover part of the deduction.
A Specified Service Trade or Business (SSTB)
Let's examine what happened to Dr. Jones' QBI deduction and see if your personal case is similar.
The SSTB Income Test
Full SSTB QBI may be considered
SSTB eligibility fades out
SSTB QBI is excluded
Now we see the problem and the catch that is causing it. Dr. Jones success, while marvelous, is taking away the deduction that was meant to be the hand up for small business owners. But, what if he could get it back with proper planning?
A 401(k) Plan Is Enough to Reopen the Door.
Anson can combine the 2026 employee deferral and employer contribution for a modeled owner contribution of $72,000. Because he has employees, the illustration also includes a 3% employer contribution of $8,700 for his team, bringing the total current income reduction to $80,700.
The plan contribution reduces both taxable income and QBI. Even so, getting taxable income back inside the SSTB range is valuable because part of the remaining QBI becomes eligible again.
This Is More Than Tax Deferral.
The retirement contribution creates the first deduction. The lower taxable income then restores a second deduction under Section 199A. That second layer does not require Anson to place another dollar into the retirement account.
Retirement-plan deduction
The modeled plan combines $72,000 for Anson with $8,700 of employer contributions for his five employees.
New Section 199A deduction
Crossing back into the SSTB phase-in range restores a deduction that was unavailable before the plan contribution.
Modeled current deduction impact
The two deductions work together, although only the retirement contribution places money into a tax-deferred account.
The $80,700 retirement-plan deduction includes contributions for Anson and his employees. Taxable distributions may follow. The modeled $26,606 Section 199A deduction is different. It is a new current deduction created by moving back into eligibility.
How Anson Arrives at $577,800.
This supporting ledger preserves the before-planning calculation without interrupting the opening explanation.
The Next Level
A properly designed 401(k) plan solves Anson's first problem. The practice may be able to go further by placing his spouse on payroll and pairing 401(k) allocations with a cash balance pension plan. His five employees remain part of every design.
before owner wages, employer payroll taxes, and retirement-plan funding
Two participants create more planning capacity.
In this illustration, Anson and his spouse each receive W-2 compensation and participate in the plan. Their combined 401(k) funding can reach $160,000 if both are age 50 or older and otherwise eligible.
A cash balance plan then adds an illustrative $400,000 of employer funding. The exact amount is not a statutory election: an actuary must calculate it from ages, compensation, promised benefits, plan assets, and design.
Modeled together, the wages and plan funding bring household taxable income to roughly $378,000—below the $403,500 SSTB threshold—even though the practice began with $1 million.
Details behind the Illustrations.
These supporting details are available for readers who want to examine the employee census, modeling assumptions, and source material behind the case study.
How the $82,000 Comparison Was Calculated
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
Employee Census
Dr. Jones cannot use an owner-only retirement plan. Any plan design must account for the people who help operate his practice, including Cat, a nurse practitioner and clinical provider.
Methodology & Limits
- The first case models an orthopedic spine surgeon, age 52, operating a private medical practice through an S corporation and filing jointly with no other material household income, capital gain, or itemized deductions. The $100,000 of other business expenses includes all employer payroll taxes, including those attributable to Dr. Jones's W-2 wage.
- 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. A wage this low may not be defensible for the services of a successful orthopedic spine surgeon.
- The 401(k) illustration uses a $24,500 employee deferral plus a $47,500 employer contribution for Anson and a modeled 3% employer contribution of $8,700 for his five employees. No catch-up contribution is included. Eligibility, plan documents, testing, compensation, and participation can change the required cost.
- The restored QBI deduction applies the SSTB applicable percentage and the wage/property limitation phase-in. Displayed amounts are rounded; calculations use unrounded figures.
- The bonus case is a planning-capacity illustration, not a contribution quote. Cash balance funding requires actuarial design and may create ongoing funding, administration, coverage, and nondiscrimination obligations.
Primary References
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.
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