Is This Activity a Qualified Trade or Business Under 199A?

An activity is a qualified trade or business under Section 199A if it is carried on with continuity and regularity for the primary purpose of earning income or profit, and it is not one of two things the statute excludes: services performed as an employee, or — for taxpayers above the income thresholds — a specified service trade or business.¹ The One Big Beautiful Bill Act, signed in July 2025, made the deduction permanent and widened the income phase-in ranges beginning with the 2026 tax year.

The Continuity and Regularity Standard

Section 199A borrows its trade-or-business definition from Section 162, the same provision that governs ordinary business expense deductions.² The Supreme Court set out the working test in Commissioner v. Groetzinger: the taxpayer must pursue the activity “with continuity and regularity,” and the “primary purpose for engaging in the activity must be for income or profit.”³ A one-time project, a sporadic gig, or a hobby does not clear that bar.

Whether your activity clears it is a facts-and-circumstances question. The IRS looks at how much time you devote to it, whether you keep proper books and records, and whether you run it in a businesslike way. Activities with real personal or recreational appeal face closer scrutiny. To sort profit-motivated ventures from hobbies, the agency uses factors drawn from the regulations under Section 183:⁴

Whether you keep complete and accurate books, records, and accounting practices
Whether you or your advisors have studied the field’s accepted business and economic practices
The time and effort you devote, especially when the activity has no recreational appeal
Whether the assets used are expected to appreciate
Any track record of turning similar unprofitable activities profitable
Your income history from the activity, allowing for normal startup losses
The size of occasional profits compared with losses and your investment
Your other sources of income, and whether the activity is one you genuinely rely on
The recreational or entertainment aspect of the work

No single factor decides the question, and you do not need to satisfy all nine. The IRS weighs them together to decide whether the activity truly rises to a trade or business.

Employee Services Are Never Qualified

Income earned as an employee is off the table. The statute expressly excludes the “trade or business of performing services as an employee” from qualifying, and W-2 wages are not part of the QBI calculation.¹⁵ Restructuring on paper doesn’t change the answer if the underlying work relationship is that of an employer and employee.

Independent contractors who receive a 1099-NEC generally can qualify if the work meets the Section 162 standard. There is a trap for workers who leave a job and immediately begin contracting back to the same company, though. The IRS applies a three-year presumption: if you perform substantially the same services for a former employer or a related party, you are presumed to still be in the trade or business of performing services as an employee for three years after the reclassification.⁶ You can rebut the presumption with records — contracts, partnership agreements, or other evidence — that show a genuinely different working relationship.

Specified Service Trades or Businesses

Even if your activity clears the general standard, it may be an SSTB. The statute reaches this by cross-referencing Section 1202(e)(3)(A) and adding investment-related categories.¹ The listed fields are:

Health: physicians, nurses, dentists, and similar providers
Law: attorneys and legal service providers
Accounting: CPAs, enrolled agents, and bookkeeping firms
Actuarial science
Performing arts: actors, musicians, and entertainers
Consulting: businesses whose primary service is advice and counsel
Athletics: professional athletes, coaches, and team managers
Financial services: wealth management and financial advisory work
Brokerage services
Investing and trading in securities, partnership interests, or commodities

A catch-all covers any business whose principal asset is the reputation or skill of one or more employees or owners. The regulations read this narrowly: it applies mainly to endorsement income, licensing a person’s name or image, and appearance fees, rather than the ordinary operations of a service business.⁷

The De Minimis Rule

Earning some revenue from an SSTB-type service does not automatically taint the whole business. Under the regulations, if gross receipts are $25 million or less, the business avoids SSTB treatment when less than 10 percent of revenue comes from the specified service. Above $25 million in gross receipts, the threshold drops to 5 percent.⁷ A medical practice that also sells retail products, for example, may still be a qualified trade or business if product sales make up most of its revenue.

Income-Based Phase-In

The SSTB label only bites at higher incomes. If your taxable income before the QBI deduction is below the applicable threshold, you get the full 20 percent deduction regardless of your field. For 2026, those thresholds are approximately $201,750 for single filers and $403,500 for joint filers.¹ Below those amounts, the SSTB rules simply do not apply.

Above the threshold, a phase-in of $75,000 for single filers and $150,000 for joint filers applies. That means the SSTB deduction phases out entirely at roughly $276,750 (single) or $553,500 (joint) for 2026. In the phase-in band, you get a partial deduction; above the ceiling, SSTB income is fully excluded.

Rental Real Estate

Rentals are the most common gray area. Passive rental income does not automatically qualify — you need enough regular involvement to meet the Section 162 standard. To give landlords a clear path, the IRS created a safe harbor in Revenue Procedure 2019-38.⁸

The 250-Hour Rule

You must perform at least 250 hours of rental services per year for each rental real estate enterprise. For enterprises that have existed four or more years, the requirement eases: 250 hours in at least three of the last five tax years.⁹ Services that count include:

Advertising for tenants and negotiating leases
Screening applications and collecting rent
Day-to-day management and supervising repairs
Buying materials and supplies
Overseeing employees or contractors working on the property

Financial and investment work does not count. Time spent arranging financing, reviewing statements, or planning capital improvements is excluded from the 250-hour total. Hours worked by your employees, agents, or independent contractors do count, provided you track them.

Records

The safe harbor requires contemporaneous records, not logs reconstructed at year-end. Document the hours, the services performed, the dates, and who performed them.⁸ Keep separate books and records for each rental enterprise, and attach a statement to your return for any year you rely on the safe harbor.

Triple Net Leases

Property rented under a triple net lease — where the tenant pays taxes, insurance, maintenance, and utilities on top of rent — is excluded from the safe harbor.⁹ Because the landlord performs little ongoing service in these arrangements, the activity rarely meets the continuity standard outside the safe harbor either.

Qualifying Doesn’t Guarantee the Full 20 Percent

Being a qualified trade or business is the entry ticket, not the whole calculation. Once your taxable income exceeds the threshold, a secondary limit applies to each business: your deduction cannot exceed the greater of 50 percent of the business’s W-2 wages, or 25 percent of W-2 wages plus 2.5 percent of the unadjusted basis immediately after acquisition of its qualified property.¹⁰ Qualified property is tangible depreciable property still within its depreciable period, or the first ten years after being placed in service, whichever is longer.¹

The practical result: a sole proprietor with no employees and little depreciable property can see the deduction shrink toward zero above the phase-in ceiling, while a business with a substantial payroll or real estate holdings may keep the full 20 percent well above the threshold. Below the threshold, none of this cap applies and the calculation is straightforward.⁵

1
Office of the Law Revision Counsel. 26 USC 199A – Qualified Business Income
2
Office of the Law Revision Counsel. 26 USC 162 – Trade or Business Expenses
3
Justia US Supreme Court. Commissioner v. Groetzinger, 480 US 23 (1987)
4
eCFR. 26 CFR 1.183-2 – Activity Not Engaged in for Profit Defined
5
Internal Revenue Service. Qualified Business Income Deduction
6
Internal Revenue Service. Final Regulations Concerning the Deduction for Qualified Business Income Under Section 199A
7
eCFR. 26 CFR 1.199A-5 – Specified Service Trades or Businesses and the Trade or Business of Performing Services as an Employee
8
Internal Revenue Service. IRS Finalizes Safe Harbor to Allow Rental Real Estate to Qualify as a Business for Qualified Business Income Deduction
9
Internal Revenue Service. Revenue Procedure 2019-38
10
eCFR. 26 CFR 1.199A-1 – Operational Rules