2026 Section 199A: Is Your Service Business Out of Favor?

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:

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

2. 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.

• 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. 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 The OBBBA repealed the sunset, so the planning in this article pays off every year, not just this one time.

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

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.

How the Definitions Work

Big picture. For definitions of out-of-favor SSTBs under Section 199A, don’t look to the tax code sections other than Section 199A.

The IRS says that the 199A service definitions stand alone even though the IRS itself borrows sentences and paragraphs from its other regulations and uses them in the Section 199A final regulations.

For example, in its Section 199A regulations, the IRS uses many sentences, phrases, and words from the Section 448 regulations, which define “personal service corporations” by looking at the services provided by both the owner and the corporation.

The Section 199A regulations apply to the business of performing services and look to the business, regardless of whether the owner is passive or participates in any activities of the business.

To make clear what’s going on here, the IRS in its final Section 199A regulations

• contracted and expanded the “personal service” definitions beyond those provided in IRS Regulation Section 1.448-1T(e)(4), and

• specified that the final regulations for determining Section 199A out-of-favor SSTB status apply solely for purposes of Section 199A. They may not be taken into account for purposes of applying any other provision of law, except to the extent that another provision expressly refers to Section 199A(d).

To dive into the out-of-favor SSTB definitions, we selected consulting because it can apply to any type of out-of-favor business, and its wide application allows you to get the big picture of how you might make the rules work to your benefit.

Consulting as Defined by Section 199A

According to the IRS, “consulting” means providing professional advice and counsel to clients to assist them in achieving goals and solving problems.

Consulting also includes providing advice and counsel regarding advocacy, with the intention of influencing decisions made by a government or governmental agency, as well as all attempts by lobbyists and other similar professionals performing services in their capacity as such to influence legislators and other government officials on behalf of a client.

The performance of services in the field of consulting does not include the performance of services other than advice and counsel, such as sales (or economically similar services) or the provision of training and educational courses. Differentiating sales from consulting activity requires an examination and assertion of the facts and circumstances.

Planning point. The IRS generally considers separate billing for advice as consulting and not part of goods, services, training, or education.

Example. Mike is a building contractor who is doing a bathroom remodel for a client. If Mike does not separately bill for his consultation on the bathroom, he has no out-of-favor SSTB business income from the bathroom remodel.

Good congressional lobbying. Services and advice provided by architects and engineers are not consulting. Such businesses are deemed “in favor.” Hats off to good lobbying by the architects and engineers.

Out of Favor vs. In Favor: Use the Calculator

The concepts—in favor, out of favor, thresholds, phase in, phaseout—are complicated. When working with the numbers, use the updated 2026 Section 199A Deduction Calculator.

For how the mechanics work, see Tool for Your Use: Updated 2026 Section 199A Calculator.

Here are three examples to help you get started.

Out of Favor SSTB: Donna

Donna is in the business of helping clients make their personnel structures more efficient. She studies the client’s organization and structure and compares it to those of peers in the client’s industry. Donna then makes recommendations and provides advice to her client regarding possible changes in the client’s personnel structure, including the use of temporary workers.

She does not provide any temporary workers to her clients. Her fees are not affected one way or the other by whether her clients do or don’t use temporary workers.

Donna is in the business of consulting—this is a Section 199A out-of-favor SSTB.

In Favor: Ed

Ed owns and operates a temporary worker staffing firm primarily focused on the software consulting industry. Business clients hire Ed to arrange temporary workers who have technical skills and experience with a variety of business software. These temporary workers provide consulting and advice regarding the proper selection and operation of software most appropriate for each business.

Ed does not have a technical software engineering background and does not provide software consulting advice himself.

Ed reviews resumes and refers candidates when his business clients indicate a need for temporary workers. He does not evaluate his clients’ need for workers and does not evaluate the clients’ consulting contracts to determine the type of expertise needed.

Rather, the client provides Ed with a job description indicating the required skills for the upcoming consulting project, and then pays Ed a fixed fee for each temporary worker actually hired plus a bonus if that worker is hired permanently within a year of referral.

Ed’s fee is not contingent on the profits of his clients.

Ed is not in a Section 199A consulting business. He operates an in-favor business.

In Favor: Fred

Fred is in the business of licensing software to customers. He discusses and evaluates the customer’s software needs with the customer, and then advises the customer on the particular software products it licenses.

The customer pays Fred a flat price for the software license. After the customer licenses the software, Fred helps implement the software.

Fred is in the in-favor business of licensing software and not the out-of-favor business of consulting.

Doing Two or More Things: The De Minimis Rule

The regulations make it clear that you can benefit from the de minimis rule.

The rule. If the trade or business has annual gross receipts of $25 million or less—and if it gets less than 10 percent of its gross receipts from an out-of-favor SSTB, such as consulting—it is an in-favor business.

If gross receipts are greater than $25 million, substitute 5 percent for the 10 percent.

Note that the $25 million figure is fixed in the regulation and is not adjusted for inflation. As receipts grow over the years, more businesses land on the 5 percent side of the line.

De Minimis Example 1

Landscape LLC sells lawn care and landscaping equipment and also provides advice and counsel on landscape design for large office parks and residential buildings.

The landscape design services include advice on the selection and placement of trees, shrubs, and flowers and are considered under Section 199A as an out-of-favor consulting business.

Landscape LLC separately invoices for its landscape design services and does not sell the trees, shrubs, or flowers it recommends for use in the landscape design. Landscape LLC maintains one set of books and records and treats the equipment sales and design services as a single trade or business.

Landscape LLC has gross receipts of $2 million, of which $250,000 is attributable to the landscape design services, a consulting business. Because consulting services are 10 percent or more of total gross receipts, the entirety of Landscape LLC’s trade or business is an out-of-favor SSTB.

De Minimis Example 2

Animal Care LLC provides veterinarian services performed by licensed staff and also develops and sells its own line of organic dog food at its veterinarian clinic and online.

The veterinarian services are in the out-of-favor SSTB of health care.

Animal Care LLC separately invoices for its veterinarian services and the sale of its organic dog food. It maintains separate books and records for its veterinarian clinic and its development and sale of its dog food.

Animal Care LLC also has separate employees who are unaffiliated with the veterinary clinic and who work only on the formulation, marketing, sales, and distribution of the organic dog food products.

Animal Care LLC treats its veterinary practice and the dog food development and sales as separate trades or businesses for purposes of Sections 162 and 199A. It has gross receipts of $3 million. Of the gross receipts, $1 million is attributable to the out-of-favor veterinary services.

Although the gross receipts from the services in the field of health exceed 10 percent of Animal Care LLC’s total gross receipts, the dog food business is a separate in-favor business.

Note that Animal Care wins because it has two trades or businesses, which it proves with its separate financial books and its separation of its employees.

Landscape, in the previous example, failed because it had one business only, which it also proved by the way it kept its books.

Hint, hint. Pay attention to the way you keep your books.

One more reason to keep things separate. You may not aggregate an SSTB with anything else for Section 199A purposes. So the in-favor business has to stand on its own books, its own invoices, and (as Animal Care shows) ideally its own employees.

Takeaways

When you have 2026 taxable income equal to or less than $403,500 (married, filing jointly) or $201,750 (filing as a single taxpayer or head of household), you can relax. Regardless of your type of pass-through business, you deduct the lesser of

• 20 percent of qualified business income, or

• 20 percent of taxable income reduced by defined capital gains.

But when your 2026 taxable income is greater than $553,500 (married, filing jointly) or $276,750 (filing single or as head of household), you need to look more closely at what is or is not an SSTB. With consulting, for example:

• You are generally consulting when you bill separately for consulting.

• You are not consulting when selling products or services, or when providing training or education.

• You are not consulting when you, as a building contractor, remodel a bathroom, unless you bill separately for advice.

• You are not consulting if you are an architect or engineer or are rendering services as such.

If you are over the thresholds and your business has both in-favor and out-of-favor components, keep the following two de minimis rules top of mind:

• Rule 1. You avoid the out-of-favor classification when your out-of-favor receipts are less than 5 percent or 10 percent of gross receipts.

• Rule 2. You can have two businesses (one in favor and one out of favor) when you treat each business as a separate trade or business in your books of account.

Three more points for 2026:

• The deduction is permanent. The sunset that would have killed Section 199A after 2025 is gone, so entity and bookkeeping changes pay off every year from here on.

• The phase-in band is 50 percent wider. For an SSTB, the band between the threshold and the ceiling is where a partial deduction lives, and for 2026 it runs $75,000 (single) or $150,000 (married) above the threshold.

• The new $400 minimum deduction does not help a pure SSTB above the ceiling, because that business is not a qualified trade or business. Carve out a real in-favor business, and you change that answer.