Morning: Small Business Tax Tips (New Haven): Section 199A and the Qualified Business Income Deduction, The 20% Pass-Through Write-Off New Haven Owners Should Review Before Year-End

NEW HAVEN, CT, Jose's Tax Service, September 29, 2026

Prepared for the Tuesday, September 29, 2026, 8:00 AM Small Business Tax Tips edition.

New Haven small business owners should review the Section 199A Qualified Business Income (QBI) deduction before December 31. The deduction may allow eligible individuals to deduct up to 20% of qualified business income from a sole proprietorship, partnership, S corporation, or qualifying limited liability company (LLC).

The deduction is now permanent under the One Big Beautiful Bill Act (P.L. 119-21). It is no longer a temporary provision scheduled to expire.

The calculation remains technical. Filing status, taxable income, business classification, W-2 wages, qualified property, ownership structure, and participation records can affect the result.

1. Review the 2026 Thresholds Before Year-End!

For 2026, the principal Section 199A taxable-income thresholds are:

These amounts generally refer to taxable income before the QBI deduction.

Use the thresholds as follows:

1. At or below the threshold: The full QBI rules generally apply. SSTB restrictions and W-2 wage and qualified-property limitations generally do not reduce the deduction.
2. Within the phase-in range: The limitations are applied gradually. The amount of QBI eligible for the deduction may be reduced.
3. Above the phase-in range: The W-2 wage and qualified-property limitations apply fully. An SSTB may receive no QBI deduction.

Taxable income should be projected before year-end. A business owner who crosses a threshold may experience a materially different deduction calculation.

Reminder: Do not estimate the deduction using gross receipts alone. Use projected net business income and projected household taxable income.

2. Understand the New $400 Minimum Deduction!

For tax years beginning after 2025, Section 199A includes a $400 minimum deduction for an eligible taxpayer with at least $1,000 of QBI from an active qualified trade or business.

For this purpose, the business must be one in which the taxpayer materially participates. The minimum deduction generally operates as the greater of:

• The deduction calculated under the regular Section 199A rules; or
• $400, if the taxpayer satisfies the applicable requirements.

The minimum deduction is not universally available. It does not apply to an SSTB owner whose taxable income is above the applicable phase-in range. The taxpayer must also meet the active business and QBI requirements.

Material participation should be documented using calendars, project records, management notes, client communications, payroll records, and time logs. Do not rely on a general statement that the owner is “involved in the business.”

The regular QBI deduction and the new minimum deduction are separate analytical steps. Review both before finalizing the federal return.

3. Classify SSTB Income Correctly!

A specified service trade or business (SSTB) is subject to special Section 199A rules. Common SSTB fields include:

• Health
• Law
• Accounting
• Actuarial science
• Performing arts
• Consulting
• Athletics
• Financial services
• Brokerage services
• Investing and investment management
• Trading or dealing in securities, commodities, or partnership interests

The principal-asset reputation-or-skill rule may also apply in limited circumstances.

SSTB treatment depends on taxable income:

• Below $201,750 for single filers or $403,500 for married filing jointly: SSTB status is generally irrelevant to the deduction.
• Within the applicable phase-in range: The SSTB deduction phases out. A percentage of the business may remain eligible.
• Above $276,750 for single filers or $553,500 for married filing jointly: SSTB income generally receives no QBI deduction.

Engineering and architecture are explicitly excluded from SSTB classification. An engineering firm or architecture practice is therefore analyzed under the general QBI rules, including the W-2 wage and qualified-property limitations at higher income levels.

Do not classify a business solely by its marketing language. Review the actual services performed, contracts, revenue sources, employee functions, and ownership structure.

Deadline reminder: Complete the classification review before year-end. A late reclassification may require amended bookkeeping, payroll, or estimated-tax calculations.

4. Apply the W-2 Wage and Qualified-Property Limits!

For non-SSTB businesses, the deduction may be limited when taxable income exceeds the threshold. The limitation is generally based on the greater of:

• 50% of W-2 wages paid by the qualified trade or business; or
• 25% of W-2 wages plus 2.5% of the unadjusted basis immediately after acquisition (UBIA) of qualified property.

The limitation phases in between $403,500 and $553,500 for married filing jointly and between $201,750 and $276,750 for single filers.

Review these records before December 31:

1. Employee Forms W-2 and payroll registers.
2. Year-end bonuses and their payment dates.
3. Fixed-asset schedules.
4. Acquisition dates and placed-in-service dates.
5. Depreciation records.
6. Business ownership and aggregation documents.

Do not create payroll solely to pursue a larger QBI deduction. Compensation must reflect the business’s facts, services performed, cash flow, and payroll compliance requirements. An unsupported payroll decision may create employment-tax problems and may lead to penalties.

5. Review S-Corporation Compensation and Participation Records!

An S corporation owner should separate reasonable compensation from shareholder distributions.

Reasonable compensation reported on Form W-2, Wage and Tax Statement, is not QBI. The remaining pass-through business income reported on Schedule K-1 (Form 1120-S) may qualify, subject to the Section 199A rules.

Review the following:

• The owner’s duties and hours.
• Comparable compensation data.
• Payroll consistency.
• Corporate minutes and resolutions.
• Distributions compared with wages.
• Business profitability and cash requirements.

Underpaying reasonable compensation may create employment-tax exposure. Overpaying compensation may reduce QBI unnecessarily. Model the result rather than applying a fixed percentage.

For the new $400 minimum, document material participation. For the broader QBI deduction, material participation is not generally required in every case. The trade or business must still qualify under the applicable Section 199A rules.

6. Analyze Rental Real Estate Separately!

Rental real estate may generate QBI when the activity rises to the level of a trade or business under Internal Revenue Code (IRC) §162.

Revenue Procedure 2019-38 provides a rental real estate safe harbor for Section 199A purposes. The safe harbor generally requires separate books and records, documentation of rental services, and specified hours of rental-service activity. Certain arrangements, including some triple-net leases, may not qualify.

Rental real estate that does not meet the safe harbor may still qualify when the facts establish a Section 162 trade or business. Review:

• Separate books and bank accounts.
• Property-management activity.
• Rental-service hours.
• Lease terms.
• Repairs and maintenance.
• Common ownership with an operating business.
• Material participation for passive-activity purposes.

Material participation is especially important for the new active-business minimum deduction. It also affects passive-loss treatment. However, material participation alone does not convert every rental activity into QBI.

Reminder: Retain the rental logs and safe-harbor workpapers with the 2026 tax records.

7. Prepare the Correct Federal Reporting Forms!

The federal QBI deduction is generally reported through one of two forms:

• Form 8995, Qualified Business Income Deduction, Simplified Computation: Generally used when taxable income before the QBI deduction is at or below the applicable threshold and the taxpayer does not have a situation requiring the full computation.
• Form 8995-A, Deduction for Qualified Business Income: Used for higher-income or more complex situations.

Form 8995-A may require:

• Schedule A: Specified Service Trades or Businesses.
• Schedule B: Aggregation of Business Operations.
• Schedule C: Loss Netting and Carryforward.
• Schedule D: Special Rules for Patrons of Agricultural or Horticultural Cooperatives.

Partnerships and S corporations do not claim the individual QBI deduction themselves. They provide the necessary Section 199A information to owners through Schedule K-1 attachments.

Review the IRS Qualified Business Income Deduction guidance, Instructions for Form 8995, and Instructions for Form 8995-A. The IRS may issue updated 2026 forms and instructions.

8. Separate Federal and Connecticut Treatment!

The federal Section 199A deduction does not automatically flow through to the Connecticut income tax return.

Connecticut generally begins its individual income-tax calculation with federal adjusted gross income (AGI). The federal QBI deduction is applied after AGI when calculating federal taxable income. Connecticut does not provide a separate state-level Section 199A deduction under current guidance.

Review current Connecticut Department of Revenue Services (DRS) tax guidance before filing. The federal deduction may reduce federal taxable income while the related business income remains included in the Connecticut tax base.

The Connecticut pass-through entity tax is a separate analysis. It should not be treated as a Connecticut QBI deduction.

9. Complete These Year-End Actions!

Before December 31, take the following steps:

1. Project 2026 taxable income. Include business income, wages, investment income, retirement contributions, and capital gains.
2. Review the entity structure. Compare sole proprietorship, partnership, LLC, and S-corporation treatment.
3. Verify reasonable compensation. Confirm that S-corporation wages are supported and properly processed.
4. Document material participation. Maintain hours, calendars, contracts, and operational records.
5. Review SSTB classification. Confirm whether the business is subject to the phase-in rules.
6. Calculate W-2 wages and UBIA. Reconcile payroll and fixed-asset records.
7. Evaluate rental real estate. Review the Section 162 standard and Revenue Procedure 2019-38 safe harbor.
8. Check Schedule K-1 information. Confirm that the pass-through entity provides complete QBI data.
9. Model federal and Connecticut results separately.
10. Schedule a professional review before December 31.

Incorrect classification, incomplete records, or late planning can reduce the deduction, delay processing, or lead to penalties.

10. Schedule a New Haven QBI Review!

Section 199A can be valuable for New Haven sole proprietors, partnerships, S-corporation owners, and other pass-through business owners. The deduction is not automatic. It requires accurate income projections, correct business classification, complete payroll records, and appropriate federal reporting.

Jose’s Tax Service provides in-person and virtual appointments, same-day availability, personalized tax planning, bookkeeping support, and $0 upfront payment. Visit Jose’s Tax Service or review the Small Business Learning Center before your year-end planning meeting.

Closing reminder: Review your 2026 QBI projection, verify your records, and complete entity, compensation, participation, and Connecticut planning before December 31, 2026.

Category: Tax Planning | Tags: small business tax, New Haven business, deductions, tax strategy