Office of Tax Analysis 

Working Paper 118

May 2019

Simulating the 199A Deduction for Pass-through 

Owners

Lucas Goodman*, Katherine Lim*, Bruce Sacerdote* and 

Andrew Whitten*

The OTA Working Papers Series presents original research by the staff of the Office of Tax 

Analysis. These papers are intended to generate discussion and critical comment while 

informing and improving the quality of the analysis conducted by the Office. The papers are 

works in progress and subject to revision. Views and opinions expressed are those of the 

authors and do not necessarily represent official Treasury positions or policy. Comments are 

welcome, as are suggestions for improvements, and should be directed to the authors. OTA 

Working Papers may be quoted without additional permission. 

U.S. Department of the Treasury 

Office of Tax Analysis 

May 2019
SIMULATING THE 199A DEDUCTION FOR PASS-THROUGH OWNERS 

May 2019

Lucas Goodman1, Katherine Lim2, Bruce Sacerdote3 and Andrew Whitten4

We analyze the new Section 199A deduction for pass-through income using a representative 

sample of administrative data from tax year 2016. We identify the taxpayers who would have 

benefited from the pass-through deduction had it applied in 2016. The analysis uses 

taxpayers’ reported income, abstracting from behavioral responses, and applies key aspects 

of 2018 tax code. We do not attempt to model any potential economic growth spurred by 

199A, nor do we model the economic incidence of the deduction. The estimated tax savings 

from the deduction, measured in 2018 dollars, is $34.5 billion. The majority of the beneficiaries 

of the deduction are in the bottom 80 percent of the income distribution. However, 60 

percent of pass-through income, and 72 percent of the statutory benefit of the passthrough deduction, accrues to taxpayers in the top five percent of adjusted gross income 

(above roughly $208,000). Without the 199A guardrails, we estimate that this group would 

receive 83 percent of the statutory benefit.

(JEL H24, H25, H26)

Keywords: Section 199A, Pass-through Deduction, Administrative Tax Data

*We thank Janet McCubbin for her helpful comments. The views expressed in this paper do not necessarily represent

the official position of the U.S. Department of the Treasury. The authors declare that they have no relevant financial

interests that relate to the research described in this paper.

1 Lucas Goodman: Office of Tax Analysis, U.S. Department of the Treasury, Lucas.Goodman@treasury.gov.

2 Katherine Lim: Office of Tax Analysis, U.S. Department of the Treasury, Katherine.Lim@treasury.gov.

3 Bruce Sacerdote: Department of Economics, Dartmouth College, Bruce.i.sacerdote@dartmouth.edu. 

4 Andrew Whitten: Office of Tax Analysis, U.S. Department of the Treasury, Andrew.Whitten@treasury.gov. 

U.S. Department of the Treasury 

Office of Tax Analysis 

May 2019
Around half of business income in the United States is earned by pass-through businesses such as 

partnerships, sole proprietorships, and S corporations (Cooper et al., 2016). Recently-passed tax legislation, colloquially known as the Tax Cuts and Jobs Act (TCJA; P.L. 115-97), created a new deduction 

on this income for many individual pass-through business owners, effective in 2018. In this paper, we 

provide a detailed analysis of which taxpayers will likely beneft from the new deduction. Using a 

sample of 780,000 taxpayers that is representative of the population who reported pass-through income 

in 2016, we examine the distribution and size of the deduction had it been in effect for tax year 2016. 

We take reported incomes as given but apply the 2018 tax code. Thus the results represent the effect of 

the deduction under the assumption that owners and businesses do not have any behavioral responses 

to this provision or any other provisions of TCJA. While this assumption is unrealistic, it nonetheless 

provides a useful benchmark.1 

The distribution of tax savings under the pass-through deduction is unclear a priori. Pass-through 

income is known to be highly concentrated at the top of the income distribution. For example, Cooper 

et al. (2016) show that 67 percent of S corporation income, and 69 percent of partnership income, 

accrues to the top one percent of tax units.2 This is signifcantly more concentrated than C corporation 

income (as proxied by dividends), of which 45 percent accrues to the top one percent (Cooper et al., 

2016). However, the rules and regulations of Section 199A establish guardrails that limit who may 

beneft from the deduction. Two limitations begin phasing in at $315,000 in taxable income for married 

taxpayers ($157,500 for unmarried) that affect the distribution of tax savings under Section 199A.3 

For taxpayers with incomes above the top of the phase-in range, the guardrails eliminate the portion 

of the 199A deduction derived from businesses that either are “specifed service trades or businesses” 

(SSTBs) or do not pay suffcient W-2 wages or own enough capital assets. 

Our baseline estimate is that taxpayers would have claimed $156 billion in deductions in the absence 

of behavioral responses, which translates into total tax savings of $34.5 billion.4 This estimate is 

adjusted for infation to 2018 dollars, as are all dollar values generally throughout the paper. We caution 

that this baseline estimate overstates the steady-state no-behavior tax savings, because it does not take 

into account carryforward of prior year losses. The section 199A deduction requires that individuals 

with pass-through losses carry them forward to offset future gains before claiming the deduction on 

those gains. These carryforwards are irrelevant in the frst year of the 199A deduction, but over time 

they will reduce the tax savings from the deduction. To gauge the magnitude of this effect, we estimate 

that taxpayers would have created $273 billion in losses to be carried-forward in 2016. Assuming 

that half of these carryforwards would ultimately offset future pass-through income for taxpayers with 

average marginal tax rates of 32%, the future reduction in tax savings is $8.7 billion. Thus a crude 

estimate of steady-state no-behavior tax savings is $34.5b - $8.7b = $25.8 billion. 

We estimate that the section 199A guardrails for higher income taxpayers signifcantly curtail the 

tax savings associated with the deduction. Without these guardrails, our baseline estimate (ignoring 

1By assuming behavior is fxed, we also implicitly assume that the full incidence of the tax savings is on the business owner 

to which the savings are statutorily assigned. In reality, as markets adjust to the incentives to invest in pass-through businesses, 

other members of the economy – such as employees of pass-through businesses or owners of capital more generally – may beneft 

from the pass-through deduction as well. We do not estimate these effects. 2Note, though, that tax units are not a close proxy for households. Larrimore, Mortenson and Splinter (2017) fnd that 

household incomes are more equally distributed than are tax unit incomes. 3For this purpose, taxable income is determined disregarding the potential Section 199A deduction. The length of the phase-in 

region is $100,000 for married taxpayers and $50,000 for unmarried taxpayers. 4This estimate includes only the pass-through deduction for individuals. It excludes the Section 199A deduction for qualifed 

Real Estate Investment Trust dividends, qualifed publicly traded partnership income, and certain income from co-operatives. 

U.S. Department of the Treasury 

Office of Tax Analysis 

May 2019

1 
carryforward losses) increases by 66 percent, to $57.4 billion.5 This effect is driven by two separate 

limitations that only apply to high-income taxpayers. First, they may not claim the deduction on income 

from service sector businesses. Relative to the no-guardrails scenario, this reduces the estimated tax 

savings by $13.4 billion. Second, they may not claim the deduction on income from (non-service) 

businesses that do not have suffciently large wage bills or capital stock. This further reduces the tax 

savings by $9.5 billion. 

The guardrails also have signifcant distributional implications. In the absence of guardrails, we 

estimate that 83 percent of the total tax savings from the pass-through deduction accrues to the top fve 

percent of tax units, with 64 percent accruing to the top one percent. After accounting for the guardrails, 

the top fve percent and top one percent receive 72 and 47 percent of the tax savings, respectively. For 

comparison, these groups report 60 and 43 percent of (positive) pass-through business income. Thus, 

in aggregate, the guardrails bring the distribution of tax savings more in line with the distribution of 

pass-through income. 

By their nature, the guardrails affect owners of certain types of businesses more than others. Looking across industries, we fnd that owners of professional services, health, and fnance/insurance businesses – three of the top fve industries generating pass-through business income – are particularly 

affected by the guardrails. Owners in these three industries see their tax savings from these businesses 

reduced by 59 percent, or $12.9 billion. In aggregate, these three industries account for over half of the 

total effect of the guardrails. This effect is driven by a combination of frms in such industries being 

more likely (1) to be owned by taxpayers above the income thresholds, (2) to be an SSTB, or (3) to 

have insuffcient W-2 wages or capital assets. In contrast, owners of businesses in the other two of the 

top fve industries – construction and real estate – have their tax savings reduced by only 30 percent, or 

$3.7 billion. This accords with intuition, as these industries are capital intensive and are less likely to 

contain SSTBs. 

The actual tax savings realized in 2018 will differ from our 2016-based estimates for a number of 

reasons. First, our estimates are based on a simple application of the 199A deduction and the 2018 tax 

schedule to 2016 concepts of taxable income adjusted for the largest components of the TCJA. In reality, 

in 2018 the other unmodeled provisions of the TCJA will also change the defnition of taxable income.6 

Second, our calculated tax savings require assumptions to determine the effect of the guardrails. While 

the tax data provide rich information to approximate which taxpayers and incomes are eligible, actual 

eligibility will depend on facts and circumstances of the business and taxpayer that are not readily 

observable from 2016 tax returns. Finally, taxpayers will almost certainly respond to the provisions, 

changing behavior in order to receive larger deductions. At present, it remains unknown to what extent 

and on which margins taxpayers will respond. We hope to shed light on these questions once data from 

the 2018 tax year are available. 

I Institutional Background 

In the U.S., pass-through businesses do not pay tax at the entity level. Instead, their income “passes 

through” the business and is taxed as income to the owner. If the owner is an individual, then the income 

faces individual tax rates. Pass-through business income generally retains its character, meaning that 

5If we also relax the limitation whereby the deduction may not exceed twenty percent of ordinary taxable income, total tax 

savings rises to $62.9 billion. This limitation applies to all taxpayers regardless of income. 6The aggregate amount of income may also change in response to TCJA; we do not model this. 

U.S. Department of the Treasury 

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May 2019

2 
items like long-term capital gains from a pass-through business will be taxed at the individual’s capital 

gains rate while ordinary business income will face the ordinary income tax rates. Pass-through entities 

are characterized as sole proprietorships, S corporations or partnerships for tax purposes. Limited 

liability companies (LLCs) as a default are taxed as sole proprietorships if they are single-member, and 

as partnerships if they are multi-member; however, either form of LLC may elect to be taxed as an S 

corporation (or as a C corporation, foregoing pass-through status). 

There are two crucial differences between the tax regimes of C corporations and pass-through businesses for individual owners. The frst is that income earned in a pass-through only faces individual taxes while C corporation income faces the corporate tax, applied at the entity level, as well as 

individual-level taxes on shareholder dividends. The second is that owners of C corporations pay individual taxes only when dividends are distributed, while pass-through income is taxed in the year that it 

is earned regardless of when the income is distributed to owners. C corporations can generally retain 

earnings indefnitely, delaying the individual-level tax on dividends as long as desired. Determining 

whether effective tax rates are lower for C corporation or pass-through owners depends on a number of 

factors including the corporate tax rate, individual ordinary income tax rates, the dividend tax rate, the 

business’s net profts, and the extent to which the business retains earnings. Despite this complexity, 

the overall trend is clear: since the Tax Reform Act of 1986, the share of business activity occurring in 

pass-through entities has been steadily increasing (Smith et al., 2017). 

The taxation of pass-through owners’ compensation for their labor varies depending on the entity 

type. Owners of sole proprietorships do not pay wages to themselves; instead ordinary income from 

sole proprietorships faces ordinary income tax rates as well as self-employment taxes, which mimic 

the payroll taxes that would be applied to wage income. In contrast, active owners of S corporations 

are required to receive wages meeting reasonable compensation criteria. This income is deductible 

to the S corporation and for the owner is treated as any other wage income and therefore faces payroll tax. The remainder of S corporation income is not subject to payroll or self-employment taxes. 

Individual partners (owners of partnerships) face something of a hybrid of the tax treatments of sole 

proprietors and S corporation shareholders. They do not receive wage income, nor are they subject to 

reasonable compensation rules; however, the ordinary income they receive is generally subject to selfemployment taxes, like sole proprietors’ income. An important exception to this rule is that limited 

partners (roughly speaking, those who do not materially participate in the business) are not generally 

subject to self-employment taxes on their ordinary business income. Thus their income is taxed like 

that of an S corporation shareholder who is not employed by the S corporation. Though they avoid 

payroll taxes, passive owners of S corporations and partnerships are generally subject to the 3.8 percent 

Net Investment Income Tax, which is applied to the investment income of taxpayers above a certain 

income threshold ($250,000 if married fling jointly). 

In December 2017, the bill originally titled the “Tax Cuts and Jobs Act” was signed into law. 

Among its many provisions is the introduction of Section 199A, which creates a deduction for passthrough owners, effective for tax years 2018 through 2025.7 Though the rules governing this deduction 

are complicated, at its core it allows individuals to deduct up to twenty percent of their pass-through 

business income from taxable income. This change reduces effective average and marginal tax rates on 

pass-through income relative to other forms of ordinary income. 

7Section 199A replaces former Section 199, which provided the Domestic Production Activities Deduction. Section 199A 

also allows a deduction for qualifed Real Estate Investment Trust dividends, qualifed publicly traded partnership income, and 

certain income from co-operatives. In addition, Section 199A allows trusts to beneft from the general pass-through deduction. 

However, we do not study these aspects of the law. 

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Only income that is considered qualifed business income (QBI) is eligible for the pass-through 

deduction. QBI from pass-throughs generally includes ordinary business income, rents and royalties, 

and interest income properly allocable to the business. As previously mentioned, income from a passthrough business generally retains its character when passed to an owner so while capital gains and 

qualifed dividends from a pass-through business are not considered QBI, they remain eligible for the 

lower capital gains rates. Any wages paid to active S corporation owners or guaranteed payments to 

partners are also not considered QBI. 

There are a number of limitations that constrain the 199A deduction. As we show, these limitations 

have a large effect on the distribution of the deduction benefts. Individuals with taxable income above 

the top of a phase-in range ($415,000 if married fling jointly, $207,500 for other taxpayers) are subject 

to two guardrails.8 The frst is that income derived from a specifed service trade or business (SSTB) 

is not considered QBI and therefore is ineligible for the deduction.9 The second is that, for taxpayers 

above the top of the phase-in range, any portion of the deduction derived from a non-SSTB is reduced 

(potentially to zero) unless the business pays a suffcient amount of wages to employees or owns a 

suffcient amount of tangible capital. Specifcally, the amount of the deduction derived from a nonSSTB cannot exceed the greater of: half of the owner’s share of W-2 wages, or the sum of 25 percent of 

the owner’s share of W-2 wages plus 2.5 percent of the owner’s unadjusted basis of qualifed property.10 

For all taxpayers, the 199A deduction can only offset ordinary taxable income, not long-term capital 

gains or qualifed dividends. In particular, the deduction cannot exceed 20 percent of ordinary taxable 

income, meaning that taxpayers with little or no ordinary taxable income may not receive much tax 

savings from the 199A deduction. In addition, owners of multiple businesses must offset positive QBI 

with any negative QBI, potentially reducing the deduction. If the net quantity of QBI is negative, it 

must be carried forward to future years in order to offset positive QBI.11 

II Data and Historical Trends 

Our data are drawn from the population of federal tax returns and information returns of individuals 

and businesses in the United States. In particular, we take a two percent sample of all individuals who 

report nonzero pass-through income (i.e., income or loss on Schedules C, E, or F of the Form 1040) as 

a primary fler in 2016.12 We keep only observations where the sampled individual is between ages 18 

and 90 and is neither deceased nor in the year of their death. Year of birth and year of death, in addition 

to sex at the time of birth, are observed from Social Security Administration records and are matched 

to the tax data via Social Security Numbers. 

By construction, our sample is representative of the universe of taxpayers who report pass-through 

income in 2016. We focus on this group because they comprise taxpayers who are particularly likely to 

be affected by the new 199A deduction, including both taxpayers who consistently report pass-through 

income as well as those who only occasionally report such income. The incentives created by Section 

8These limitations are phased in from $315,000-$415,000 in income for joint flers and $157,500-$207,500 for other flers. 

For taxpayers with incomes in the phase-in region, only a fraction of the limitations apply while for taxpayers with incomes 

above the end of the phase-in region the limitations are in full effect. 9To be clear, for taxpayers below the phase-in thresholds, SSTBs can generate QBI. 

10“Owner’s share of wages” refers to the taxpayer’s share of the business owned (for purposes of the wage deduction) multiplied by the total W-2 wage bill paid to all employees. 11See Joint Committee on Taxation (2019) for a more detailed description of the 199A deduction, including examples of how 

it is calculated. 12Pass-through income cannot be easily split between joint flers so it is assigned at the tax unit level. By sampling at the 

primary tax fler level, we avoid giving joint flers a higher likelihood of entering our sample for the same pass-through income. 

U.S. Department of the Treasury 

Office of Tax Analysis 

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4 
199A are also relevant for taxpayers who have never reported pass-through income, to the extent that 

they consider beginning to report such income under the new tax regime. However, these responses are 

irrelevant for purposes of calculating the no-behavior benchmark, which is the focus of this paper. 

We construct detailed information on pass-through business income. From Schedule E we observe 

total net gains or losses from partnerships or S corporations, passive gains and passive losses from 

partnerships or S corporations, rental income, royalty payments, and income from estates and trusts. 

For tax units with sole proprietorship income reported on Schedule C, we compute the total amounts of 

the following variables across all sole proprietorships: gross receipts, income before expenses, wages 

paid, and total expenses. We also retain records for the two sole proprietorships with the highest gross 

receipts. We perform the same exercise for tax units with Schedule K1s from partnerships or S corporations. We compute the total amounts of the following variables across all partnership K1s and all 

S corporation K1s (as well as retaining specifc records for the two highest potential QBI businesses): 

potential QBI, ordinary income, and guaranteed payments. For taxpayers with partnership or S corporation income, our measure of potential QBI is derived from Schedule K1 data.13 It is the sum of 

ordinary income, net rental real estate income, other net rental income, royalties, and interest payments, 

less any Section 179 deduction. For taxpayers with other business income reported on Schedules C, 

E, or F, we assume all such net income is potential QBI. Whether income is actually QBI depends on 

the taxpayers’ income and whether the income is derived from an SSTB. For the two highest potential 

QBI businesses, we also retain ownership shares and match K1s with Forms 1065 (partnerships) and 

1120-S (S corporations) in order to retrieve NAICS industry codes, wages paid, and a proxy for tangible 

capital. 

In the top panel of Table 1, we show demographic information for our sample. 56 percent of the 

sample is married fling jointly; the remaining 44 percent are nearly evenly split between sex. The 

median and mean age of the sample is 50 years old. The median adjusted gross income (AGI) of our 

sample is $55,200, which is modestly larger than the national median AGI of tax flers, $42,700.14 

The median amount of pass-through income is quite small, at $3,500, indicating that pass-through 

businesses are not the dominant income source for many taxpayers with this type of income. Additionally, over a quarter of our sample have net pass-through losses. Unsurprisingly, mean AGI and mean 

pass-through income are substantially larger than their associated medians, at $117,242 and $28,755 

respectively. 

We identify fve different sources of pass-through income that could potentially be eligible for the 

pass-through deduction: farming income from Schedule F, sole proprietorship income from Schedule 

C, partnership and S corporation income from Schedule E, and rents and royalties separately stated 

on Schedule E.15 In the bottom panel of Table 1, we report statistics for the subsamples that have 

nonzero amounts of these types of income. The most common forms of pass-through income earned by 

the sample are Schedule C (sole proprietors), S corporations and partnerships, and rental income from 

Schedule E. Among taxpayers that have Schedule C income, the median amount is $4,000 and the mean 

13One limitation of using the K1 data is that it does not account for passive income loss limitations, which are refected on the 

taxpayer’s Schedule E. Under Section 199A, such losses would be included in the QBI calculation only when they are ultimately 

recognized. 14Here, and throughout the paper, all dollar values are adjusted to 2018 levels using the July Consumer Price Index for All 

Urban Consumers. To protect taxpayer privacy, medians are rounded to the nearest $100. The fgure for the national population 

is constructed using the representative, cleaned sample produced by the Statistics of Income division of the IRS. 15In general, rental income and royalty income are considered QBI only if the underlying activity rises to the level of a “trade or 

business” as defned in Section 162. In this paper, we assume that all rental income and royalty income meets this standard. Thus, 

our estimates for tax savings associated with these types of entities may be modestly overstated. In addition, we do not model 

the possible reduction in the section 199A deduction that may apply to farmers who participate in agricultural cooperatives. 

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Table 1: Summary Statistics 

Fraction of Sample 

Married Filing Jointly 

Unmarried Male 

Unmarried Female 

0.56 

0.21 

0.22 

Mean Median Standard Deviation 

Age 50.3 50 15.9 

Adjusted Gross Income 117,242 55,200 1,127,570 

Total Pass-Through Income 28,755 3,500 468,567 

Sole Proprietorship 9,258 0 71,649 

S Corporation and Partnership 17,939 0 448,128 

Farms: Schedule F -490 0 14,866 

Rents: Schedule E 8,373 0 66,048 

Royalties: Schedule E 776 0 145,352 

Observations 750,300 

Individuals with Non-Zero Income of Each Type

Mean Median Standard Deviation Fraction of Sample 

Sole Proprietorship 14,194 4,000 88,321 0.652 

S Corporation and Partnership 78,620 6,700 935,608 0.228 

Farms: Schedule F -10,558 -5,300 68,261 0.046 

Rents: Schedule E 35,672 15,100 132,705 0.235 

Royalties: Schedule E 15,056 300 640,205 0.052 

Notes: The sample is constructed by selecting a 2% random sample of taxpayers with nonzero pass-through income in 2016. See 

Section II for details. Pass-through income is defned as the sum of net incomes on Schedules C, E, and F. Counts of observations 

are rounded to the nearest thousand and dollar values of medians are rounded to the nearest hundred. All dollar values are 

adjusted for infation to 2018 levels. This table was created by the authors using data drawn from the population of tax and 

information returns. 

is $14,194. For taxpayers with S corporation and partnership income, the median amount is slightly 

larger ($6,700), but the mean is substantially higher ($78,620). For taxpayers reporting rental income 

on Schedule E, the median amount is $15,100 and the mean is $35,672. Relatively few taxpayers 

report farming income or royalties. Of those that report farming income, the mean and median amounts 

are -$10,558 and -$5,300 respectively. Of those that report royalty income, the mean and median are 

$15,056 and $300, respectively. 

To validate our data, we collect analogous samples for all years from 2005 to 2015. We then 

compare the aggregate amounts of income implied by these repeated cross-sections (and the 2016 

cross-section) with those calculated from the cleaned cross-sectional data from the Statistics of Income 

(SOI) division of the Internal Revenue Service. These aggregates are plotted in Figure 1; panel (a) 

uses our sampling method, while panel (b) uses the SOI data. As the fgure shows, partnership and S 

corporation income fell during the Great Recession but has grown rapidly in the post-recession years. 

In general, the edited and cleaned SOI data show a similar pattern as our data, confrming that our 

sample seems to measure pass-through income adequately. 

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Figure 1: Pass-Through Income Over Time 

0

200

400

600

800

1000

1200

1400

1600

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Billions$

Schedule E: Partnership and S Corp

Schedule E: Gross Royalties

Schedule E: Gross Rents

Schedule C (a) Our Sample 

0

200

400

600

800

1000

1200

1400

1600

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Billions$

Schedule E: Partnership and S Corp

Schedule E Gross Royalties

Schedule E: Gross Rents

Schedule C

(b) SOI Data 

Both panels of the fgure show the aggregate amount of income by pass-through type. Panel (a) is derived from a sampling method analogous to our 

main sample, but applied to earlier years; panel (b) is derived from the Statistics of Income (SOI) data produced by the Internal Revenue Service. 

Both panels are weighted to represent the full U.S. population. Schedule F income is excluded in both panels because it is negative on net. All 

dollar amounts are adjusted for infation to 2018 levels. This fgure was created by the authors using data drawn from the population of tax and 

information returns. 

7 

U.S. Department of the Treasury 

Office of Tax Analysis 

May 2019
III Analysis of the Pass-Through Deduction 

In this section, we provide several estimates of the value of the section 199A deduction for pass-through 

business income had it been applicable in 2016, holding taxpayer behavior and income constant at their 

2016 levels, while applying the 2018 tax schedule. We show how estimates of aggregate tax savings 

are sensitive to our assumptions regarding eligibility. We then provide distributional analysis of the 

tax savings provided by the pass-through deduction. Throughout the paper, our analysis ignores the 

Section 199A deductions for qualifed Real Estate Investment Trust dividends, qualifed publicly traded 

partnership income, and certain income from co-operatives. 

III.A Modeling the Deduction 

Several modeling assumptions are necessary to determine what income is eligible for the section 199A 

pass-through deduction. In some cases there are complex rules for calculating the deduction that demand more information than is available in our data. For example, under the rules of Section 199A, 

components of the deduction are calculated separately for each of an individual’s trades or businesses. 

Our data, however, are at the business entity level, which may comprise multiple trades or businesses. 

Conversely, a single trade or business may span multiple tax entities. Because we do not observe each 

separate trade or business, we approximate the calculation of the deduction as follows. We consider 

each of a tax unit’s top two Schedules K1 and Schedules C to be a separate trade or business. We also 

consider the residual of “all other Schedules K1” to be an additional trade or business, and likewise for 

“all other Schedules C.” Next, we consider rental income and royalties appearing on Schedule E to each 

be an additional trade or business. Last, we consider Schedule F to be an additional trade or business. 

In sum, this gives us up to nine trades or businesses for each individual – three for Schedules K1, three 

for Schedules C, one for Schedule E rental, one for Schedule E royalties, and one for Schedule F. 

Given this split, we calculate the deduction applying the guardrails of the Section 199A deduction 

for taxpayers with taxable income above $315,000 for married flers and $157,500 for others. The 

guardrails require assumptions regarding the wages paid by the business, the tangible property held by 

the business, and whether the business is an SSTB. First, for all taxpayers we determine whether a trade 

or business produces QBI, which is a function of the business’s net income and, for taxpayers above the 

income threshold, whether the business is an SSTB. Second, if some businesses produce positive QBI 

and others produce negative QBI, we zero out the negative QBI and allocate this proportionally to the 

positive-QBI businesses. If total QBI is negative, then there is no current-year 199A deduction and the 

taxpayer carries this loss forward, reducing the 199A deduction in later periods. We separately record 

the amount of this carryforward QBI. Finally, for taxpayers above the income thresholds, we apply 

the wage and capital limitations described in Section I. Once we have computed the 199A deduction 

at the trade or business level, we aggregate up to the level of the taxpayer to compute the total 199A 

deduction. 

Our approach is imperfect in the following ways. First, we make only a few adjustments to reported 

taxable income to refect the major features of the TCJA. In order to better align the 2016 data with the 

post-TCJA law, we eliminate personal exemptions, apply the $10,000 limitation for the state and local 

tax deduction, and apply the new standard deduction amounts. However, pre- and post-TCJA taxable 

income concepts differ in many other aspects that we do not model. In addition, when applying 2018 tax 

rates, we abstract away from the phase-in and phase-out of tax credits, the alternative minimum tax, and 

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defnition in 2016.19 We convert observed depreciation to qualifed property using the ratio implied by 

the depreciation model aggregates.20 

Our modeling of the guardrail based on the qualifed property of the business also suffers from 

some of the same issues as the wages paid measure. We only use property observed in that business, 

but generally taxpayers are allowed to use capital employed in businesses owned by the entity as well. 

As with the wages, this causes us to overstate the effect of the guardrails, understating the tax savings 

from the deduction. To quantify this effect, in an alternative estimate (discussed further below) we 

allow for aggregation of wages and capital. That is, we allow for excess wages and capital in one trade 

or business to count towards alleviating the section 199A deduction limitation in another commonly 

owned business. 

Once we have calculated the deduction for the tax unit, we then apply the 2018 rate schedule to our 

TCJA-adjusted measure of taxable income to calculate tax liability with and without the deduction; the 

tax savings are equal to the difference. Our baseline estimate, reported in the sixth row of Table 2, is 

that taxpayers would have claimed $156 billion in deductions in the absence of behavioral responses, 

yielding total tax savings of $34.5 billion. These estimates are adjusted for infation to 2018 dollars, as 

are all dollar values in this section, unless otherwise indicated. For comparison, the Joint Committee 

on Taxation estimates that the 2019 fscal year cost (which includes portions of the 2018 and 2019 tax 

year costs) of the 199A deduction is $47.1 billion (Joint Committee on Taxation, 2017; not adjusted 

for infation). The Joint Committee’s 2018 fscal year estimate of $27.7 billion is also informative. It 

includes only a portion of the 2018 tax year cost and therefore places a lower bound on the 2018 revenue 

effect (Joint Committee on Taxation, 2017). We note that the Joint Committee’s estimates include 

forecasts of behavioral responses to the deduction, which tend to increase its cost, and their estimates 

include a richer interaction with other TCJA changes. Furthermore, their estimates include the effects 

of the Section 199A deductions for qualifed Real Estate Investment Trust dividends, qualifed publicly 

traded partnership income, and certain income from co-operatives; our estimate does not.21 

We also note that our baseline estimate overstates the steady-state no-behavior tax savings. We 

have implicitly assumed that 2016 is the frst year the 199A deduction would have applied in our 

counterfactual, and therefore taxpayers would have no QBI loss carryforwards. However, in future 

years, some taxpayers will have such carryforwards, reducing their 199A deduction in those years. 

To provide a sense of the magnitude of this effect, we estimate that taxpayers would have created 

$273 billion in carried-forward negative QBI in 2016. If one assumes that half of these carryforwards 

would ultimately offset future QBI for taxpayers with marginal tax rates of 32 percent, then the future 

reduction in tax savings is 0.5 × 0.32 × 0.20 × $273b ≈ $8.7 billion. Thus a crude estimate of steadystate no-behavior tax savings is $34.5b - $8.7b = $25.8 billion. 

We fnd that the various limitations on the 199A deduction have a large effect on aggregate tax 

savings. Table 2 breaks out the estimated effects, adding one provision at a time. The frst line shows 

the estimated tax savings with no limitations – i.e., simply allowing a 20 percent deduction for all passthrough business income. We estimate that taxpayers would have enjoyed tax savings of $62.9 billion 

under such a provision without behavioral responses. In the next row, we add the restriction that the 

19In this case, “entity” can be either S corporation, partnership, or individuals (Schedule C or rental income on Schedule E). In 

the case of rental income on Schedule E, we use the ratio that applies for “individuals” in the real estate rental industry (NAICS 

53), which in the depreciation model is predominantly made up of individuals with rental income on Schedule E. 20The Offce of Tax Analysis depreciation model is based on tax data sources such as Form 4562. A complete description of 

the model is outside the scope of this paper. 21Another difference is that the Joint Committee’s estimate refects projected 2018 income amounts, which are presumably 

larger than the (infation-adjusted) 2016 income amounts that we use. 

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Table 2: Estimates of hypothetical 2016 static tax savings under different provisions of Section 199A 

No limitations: 

2016 Static Deduction 

(1) 

$261.29 billion 

2016 Static Tax Savings 

(2) 

$62.85 billion 

Loss Carryforwards Generated 

(3) 

$273.24 billion 

Add ordinary income limit: 

Guardrails:

$221.00 billion $57.38 billion $273.24 billion 

Add service restriction: $162.76 billion $40.05 billion $257.72 billion 

Add income exception: 

Add wage limitation: 

Baseline: Add capital exception: 

$183.46 billion 

$153.18 billion 

$156.47 billion 

$44.02 billion 

$33.36 billion 

$34.50 billion 

$272.90 billion 

$272.90 billion 

$272.90 billion 

Allow aggregation (upper bound): $164.00 billion $37.18 billion $272.92 billion 

Notes: The frst column of this table reports the total Section 199A deduction that we estimate 2016 taxpayers could have claimed 

(holding behavior constant), under various scenarios. In the second column, this amount is converted to changes in tax liability 

by applying the 2018 statutory tax rate schedule to TCJA-adjusted taxable income (see the text of this section for details). The 

third column reports the amount of QBI losses that would be carried forward to the following year; this would generally reduce 

a subsequent year’s deduction by twenty percent of this amount. In the frst row, there are no limitations: individuals are entitled 

to a deduction of 20 percent of pass-through income. In the second row, we add the limitation that the deduction cannot exceed 

twenty percent of ordinary taxable income. In the third row, we add the restriction that SSTBs do not produce QBI. In the 

fourth row, we allow SSTBs to produce QBI for those with suffciently low income. In the ffth row, we apply the W-2 wages 

limitation. In the sixth row, we replace the W-2 wages limitation with the actual limitation, which is the greater of 50 percent of 

the taxpayer’s share of wages or the sum of 25 percent of the taxpayer’s share of wages and 2.5 percent of the taxpayer’s share of 

tangible assets. In the fnal row, we allow taxpayers to aggregate different trades and businesses in a manner that is likely more 

permissive than actual law. See the text of this section for further discussion of these calculations. All dollar values are adjusted 

for infation to 2018 levels and are weighted to represent the full U.S. population. This table was created by the authors using 

data drawn from the population of tax and information returns. 

deduction cannot exceed 20 percent of ordinary taxable income. This applies to all taxpayers, and it 

reduces the overall beneft to $57.4 billion. Next, we consider the 199A guardrails. We frst add the 

SSTB restriction as if it applied to all income levels, which reduces the beneft to $40.1 billion. Then we 

incorporate the fact that taxpayers with suffciently low income are not affected by the SSTB restriction, 

increasing the beneft to $44.0 billion. This relatively modest change refects the fact that roughly two 

thirds of potential QBI is earned by those with income in excess of the relevant thresholds; furthermore, 

such high-income individuals face higher marginal tax rates and thus receive greater benefts from 

deductions. Next, we add the provision that limits the deduction to half of the owner’s share of W-2 

wages (including the income-based exception to this limitation), which reduces the beneft substantially 

to $33.4 billion. As mentioned above, we do not observe wages paid by upstream tiers of multi-tiered 

partnerships.22 We also miss wages that frms report under their cost of goods sold. From 2016 SOI 

cross-sectional data, which have been edited for accuracy, we estimate that the latter issue affects around 

10 percent of partnerships and S corporations. For these frms, the missing wages are substantial, 

comprising around 65 percent of aggregate wages paid for both partnerships and corporations. Thus a 

more complete record of wages paid would almost surely reduce our estimate of the effect of the wage 

limitation, perhaps substantially. Finally, in the sixth row, we arrive at our best estimate of current law 

by adding in the capital-based exception to the wage restriction. This increases tax savings by a modest 

22We have attempted to trace through the Schedules K1 to fnd wages paid by higher-tiered entities. However, we were only 

able to uncover a very small amount of wages through this method. 

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Table 3: Sensitivity of estimates of hypothetical 2016 tax savings under alternative capital proxies 

Baseline proxy: Depreciation-based : 

2016 Static Deduction 

(1) 

$156.47 billion 

2016 Static Tax Savings 

(2) 

$34.50 billion 

Loss Carryforwards Generated 

(3) 

$272.90 billion 

Alt. proxy: Capital assets: $158.44 billion $35.17 billion $272.90 billion 

Alt. proxy: Total assets: $162.32 billion $36.55 billion $272.90 billion 

Notes: The frst column of this table reports the total Section 199A deduction that we estimate taxpayers could have claimed 

(holding behavior constant), under various proxies for the applicable amount of capital under the 199A guardrails. In the second 

column, this amount is converted to changes in tax liability by applying the 2018 statutory tax rate schedule to TCJA-adjusted 

taxable income (see the text of this section for details). The third column reports the amount of QBI losses that would be carried 

forward to the following year; this would generally reduce a subsequent year’s deduction by twenty percent of this amount. The 

frst row repeats the sixth row from Table 2; the capital proxy is equal to depreciation multiplied by an industry/entity-type factor, 

as discussed in the text of this section. In the second row, we replace this proxy (for partnerships and S corporations) with capital 

assets from the front page of Forms 1065 or 1120S. In the third row, we replace this proxy (for partnerships and S corporations) 

with total assets from the front page of Form 1065 or 1120S. All dollar values are adjusted for infation to 2018 levels and are 

weighted to represent the full U.S. population. This table was created by the authors using data drawn from the population of tax 

and information returns. 

amount, though the effect is somewhat larger under alternative capital proxies, as shown in Table 3. 

In the fnal row of Table 2, we investigate the effect of the aggregation rules that allow taxpayers 

to combine different non-SSTB trades or businesses for the purposes of the 199A deduction. This is 

advantageous to the taxpayer when one business is bound by the wage or capital limitation and another 

is not, as the excess wages or capital from the latter can be used to increase the deduction from the 

former. We consider a scenario in which taxpayers can arbitrarily aggregate across all of their nonSSTB trades or businesses. This likely represents an upper bound of the effect of aggregation, since the 

actual aggregation rules are more restrictive.23 We estimate that aggregation increases tax savings by 

up to $2.7 billion, or nearly 8 percent. This suggests that the aggregation rules could reduce the effect 

of the wage and capital limitations by up to 28 percent ( 37.18−34.50 ). 44.02−34.50

Overall our analyses show that, absent behavioral responses, the restrictions placed on the 199A 

deduction have a large effect on estimated tax savings. We fnd that the 199A guardrails, which apply 

only to high-income taxpayers, reduced aggregate tax savings by around 40 percent ( 57.38−34.50 ). This 57.38

static exercise provides a useful benchmark that can eventually be compared to the actual effects of the 

deduction. In future work, we plan to use post-TCJA data to study how behavioral responses change 

the tax savings associated with the deduction. 

III.B Who Benefts from the 199A deduction? 

Thus far we have focused on the aggregate tax savings provided by the 199A deduction. We now turn to 

distributional analysis, examining the characteristics of both the taxpayers who receive these benefts 

and the businesses they own. We provide estimates of tax savings stratifed by taxpayer income, by 

entity type, and by industry, elaborating on the analysis of a hypothetical 2016 in which the 2018 tax 

code applied but there were no behavioral responses to the deduction (or TCJA more generally). 

Table 4 shows the estimated tax savings of different income quantiles of adjusted gross income 

23The aggregation rules require common majority ownership and that the businesses meet certain other factors before allowing 

aggregation. 

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12 
(AGI).24 The frst column shows total pass-through business income, disregarding any entity-level 

losses. The second column estimates the tax savings with only the limitation that the deduction may 

not exceed twenty percent of ordinary taxable income (analogous to row two of Table 2). The third 

column displays our baseline estimate of the tax savings with the 199A guardrails. The fourth column 

reports the median tax savings (rounded to the nearest $100) among those with positive savings. The 

ffth column reports a count of taxpayers that own at least one entity with positive income to focus on 

the group of taxpayers who could potentially beneft from the deduction. The fnal column reports the 

share of column fve taxpayers that have positive tax savings. 

The table shows that those with AGI below the frst decile do not receive tax savings. This occurs mechanically because they have no taxable income to offset. This mechanical effect spills into 

the second and third deciles, where around one quarter and one half of taxpayers with positive passthrough income, respectively, receive a beneft from the 199A deduction. Between the 30th and 95th 

percentiles, roughly 84 percent of those with positive pass-through income receive tax savings; those 

who do not are predominantly taxpayers with gains in one business that are outweighed by losses from 

other businesses.25 We start to see substantial effects of the 199A guardrails for those between the 95th 

and 99th percentiles. The guardrails reduce their tax savings from $11.0 billion to $8.4 billion. However, the guardrails predominantly affect taxpayers in the top one percent. Only about half of taxpayers 

in the top percentile with pass-through business income receive tax savings. Removing the guardrails 

would more than double their tax savings, from $16.3 billion to $36.6 billion. 

The tax savings enjoyed by an income group rises sharply with income, largely concurrent with the 

concentration of pass-through income. Taxpayers in the top 0.1 percent enjoy an aggregate savings of 

nearly $8 billion, or about 23 percent of total tax savings from the 199A deduction. This is similar to the 

aggregate savings for the rest of the top one percent, or taxpayers between the 95th and 99th percentiles. 

Indeed, we fnd that 72 percent of the total savings accrues to taxpayers in the top fve percent, with 

47 percent accruing to taxpayers in the top one percent. For comparison, 60 percent and 44 percent of 

pass-through income is earned by these groups, respectively. Put differently, the tax savings as a share 

of (non-negative) pass-through business income for the fve AGI quintiles are 0.1, 0.6, 1.2, 1.9, and 2.9 

percent (in increasing order of AGI). While higher-income groups are more likely to be limited by the 

guardrails, lower-income groups are more likely constrained by the ordinary taxable income limitation. 

Moreover, high-income taxpayers tend to take their deductions against a higher marginal tax rate. 

While pass-through income is concentrated at the top of the income distribution, pass-through owners are not. Just over half of all taxpayers with positive pass-through business income are in the bottom 

six deciles of AGI. Moreover, 76 percent of taxpayers receiving a beneft from the pass-through deduction are outside of the top decile of AGI, and 60 percent are in the bottom four quintiles. Overall, we 

estimate that around 17.7 million taxpayers would have benefted from the deduction had it been available in 2016. For comparison, the Joint Committee on Taxation estimates that in 2019, 26.8 million 

taxpayers will claim the deduction (Joint Committee on Taxation, 2019). We cannot determine what 

drives the discrepancy between our estimate and theirs, as their estimate provides no modeling details. 

The underlying data, however, appear to be consistent: we estimate that, in 2016, roughly 37 million 

taxpayers report pass-through income, while the Joint Committee estimates 39.2 million taxpayers with 

24These quantiles are calculated using the 2016 weighted SOI individual cross-section, after eliminating dependent flers and 

tax units with non-positive AGI. They are adjusted for infation to 2018 dollars. 25Column 5 of the table includes all taxpayers with at least one pass-through business with positive net income, but taxpayers 

could have negative pass-through income overall. We include such taxpayers because they could potentially receive tax savings 

if they are high-income and the loss-generating businesses are SSTBs and therefore do not generate QBI. 

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Table 4: Hypothetical 2016 tax savings, with and without guardrails, by income bins 

Income (AGI) Total business income (bil) Tax savings 

Without With Median Number with Percent with 

guardrails (bil) guardrails (bil) nonzero savings business income (mil) tax savings 

(1) (2) (3) (4) (5) (6) 

Negative AGI Decile 1: 0-10,500 Decile 2: 10,500-17,300 Decile 3: 17,300-24,600 Decile 4: 24,600-32,800 Decile 5: 32,800-42,700 Decile 6: 42,700-55,800 Decile 7: 55,800-73,800 Decile 8: 73,800-100,000 Decile 9: 100,000-147,400 90th-95th: 147,400-208,500 95th-99th: 208,500-507,500 99th-99.9th: 507,500-2,248,000 Above 99.9th: 2,248,000-

56.175 24.984 44.783 30.859 31.281 30.664 36.869 47.918 68.199 

103.380 

95.025 

244.972 

334.157 

288.696 

0.000 0.000 0.075 0.139 0.260 0.312 0.477 0.866 1.290 3.019 3.397 

10.958 18.939 17.646 

0.000 0.000 0.075 0.139 0.260 0.312 0.477 0.866 1.289 3.018 3.350 8.373 8.364 7.975 

. . 

100 100 100 100 200 200 300 500 800 

2,100 

10,200 71,300 

0.792 0.0% 3.411 0.0% 3.221 24.3% 1.979 52.2% 1.693 84.2% 1.704 84.3% 1.919 84.6% 2.317 84.3% 2.806 83.5% 3.387 84.9% 2.113 86.2% 2.460 80.5% 0.844 47.5% 0.118 50.4% 

Totals: 1437.962 57.377 34.498 300 28.764 61.7% 

Notes: Income (AGI) quantiles are measured using the 2016 Statistics of Income individual cross-section, and are representative of tax units that fle a tax return. Quantiles are computed omitted dependent flers and flers with negative AGI. Quantile breaks are rounded for taxpayer privacy. Total business income does not include entities with net losses. Similarly, the counts of those with business income do not include those with only losses. In the table, decile 1 excludes those with negative AGI. All dollar values are adjusted to 2018 dollars, and all fgures are weighted to represent the full U.S. population. This table was created by the authors using data drawn from the population of tax and information returns. 
U.S. Department of the Treasury 

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Table 5: Hypothetical 2016 tax savings, with and without guardrails, by entity type 

Type of business Total business income (bil) Tax savings 

Without With Median Number with Percent with 

guardrails (bil) guardrails (bil) nonzero savings business income (mil) tax savings 

(1) (2) (3) (4) (5) (6) 

S Corp Partnership Schedule C business Schedule E rental Schedule E royalties Schedule F farming Undetermined S Corp / part. 

485.742 339.890 421.640 

76.647 28.368 11.662 47.014 

25.115 13.780 12.532 

2.717 0.962 0.328 1.944 

17.862 

4.316 8.159 2.197 0.222 0.330 1.412 

1,000 

100 200 200 

0 

200 100 

3.511 3.812 

18.905 

4.480 1.730 0.472 1.069 

83.5 % 68.7 % 64.5 % 77.5 % 62.2 % 72.3 % 66.8 % 

Notes: Total business income does not include taxpayers with a net business loss in the given entity type. Similarly, the counts of those with business income of a given entity type do not include those with a net business loss in that type. The categories for counts are not mutually exclusive. The category “Undetermined S Corp / part.” signifes entities that were not among the top two highest-QBI partnerships or S corporations for the taxpayer. See the text for details about the tax savings calculations. All dollar values are adjusted to 2018 dollars, and all fgures are weighted to represent the full U.S. population. This table was created by the authors using data drawn from the population of tax and information returns. 
Table 6: Hypothetical 2016 tax savings, with and without guardrails, by industry

16 

Industry Total business income (bil) Tax savings

Without With Median Number with Percent with

guardrails (bil) guardrails (bil) nonzero savings business income (mil) tax savings 

(1) (2) (3) (4) (5) (6) 

Prof. Services 260.337 11.512 5.245a 400 3.373b 73.2% 

Real Estate 225.716 7.481 4.666 200 7.477 68.7% 

Finance/Insurance 116.706 5.001 1.908 400 1.473 45.3% 

Construction 114.273 4.842 3.934 300 2.377 66.0% 

Health 113.417 5.244 1.675 400 1.930 58.5% 

Retail Trade 70.075 3.312 2.997 300 1.552 64.8% Manufacturing 62.378 3.241 2.784 500 0.475 71.3% Other Services 55.544 1.398 1.227 200 3.158 55.4% Wholesale Trade 51.865 2.419 1.971 600 0.460 71.4% Arts/Entertainment 35.693 1.446 0.341 100 0.985 62.0% Admin./Support 34.857 1.187 0.995 200 1.481 57.3% Transportation 32.191 0.875 0.763 100 1.462 54.5% Accomodation/Food 28.201 1.172 1.094 400 0.611 67.6% Agriculture 28.049 0.888 0.723 200 0.935 64.1% Holding Companies 19.161 0.840 0.325 300 0.131 49.0% Information 12.578 0.571 0.403 300 0.297 68.9% Mining, Oil/Gas 8.605 0.297 0.170 100 0.299 43.6% Education 7.010 0.266 0.234 100 0.491 72.6% Utilities 1.589 0.044 0.036 200 0.022 58.8% 

U.S. Department of the Treasury 

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May 2019

Notes: Observations are at the owner-by-business level, restricted to those businesses for which we observe a valid industry. Tax savings are calculated using the largest K1 frst, followed by the secondlargest K1, followed by all other K1s, followed by the largest Schedule C, followed by the second largest Schedule C. An tax unit can be included in multiple rows of this table if he or she owns businessesin different industries. Industries are at the two-digit NAICS level. All dollar values are adjusted to 2018 dollars, and all fgures are weighted to represent the full U.S. population. This table was created bythe authors using data drawn from the population of tax and information returns.

aWithin this industry (NAICS 54), 65.1% of the savings accrue to those below the top of the income phaseout.bWithin this industry (NAICS 54), 90.7% of those with savings are below the top of the income phaseout. 
pass-through income for 2019 (Joint Committee on Taxation, 2019). 

In Table 5 we break out the tax savings for owners of different types of entities. A given individual’s 

tax savings could contribute to multiple rows of this table if he or she owned multiple entity types. 

The vast majority of positive pass-through business income comes from S corporations (at least $486 

billion), Schedule C businesses ($422 billion), and partnerships (at least $340 billion). We estimate 

there are roughly 18.9 million taxpayers with positive Schedule C income, and at least 3.5 million 

taxpayers with positive S corporation income and 3.8 million with positive partnership income, though 

some taxpayers are included in multiple categories. In aggregate, taxpayers are expected to receive 

$8.2 billion in tax savings from their Schedule C businesses.26 If we portion out the undetermined S 

corporation and partnerships tax savings according to their share of identifable business income, then 

taxpayers are expected to receive $18.7 billion and $4.9 billion, respectively, from their S corporations 

and partnerships. Median tax savings (among those with a positive savings) across all business types 

are quite low, with the exception of S corporation owners, whose median savings is $1,000. 

Table 5 also shows that some entity types are more affected by the 199A guardrails than others. Tax 

savings provided by partnerships fall by 69 percent due to the guardrails, while savings provided by S 

corporations and Schedule C businesses are only reduced by 29 and 35 percent, respectively. Relative 

to other entity types, partnerships are more affected by both the SSTB guardrail and the wage and 

capital guardrail. 

Finally, in Table 6 we examine how the estimated savings are distributed across different industries. 

As in the previous table, a given individual can be included in multiple rows of this table if they owned 

multiple businesses. For sole proprietorships, we use the NAICS codes reported on Schedule C. For 

Schedules K-1, we link the K-1 to the corresponding Form 1065 or 1120S which contains the NAICS 

code for the business. We report the same columns as in the previous two tables.27 

The top fve industries, in descending order of pass-through business income, are professional services (e.g., legal services, accounting services, and consulting), real estate, fnance/insurance, construction, and healthcare. The effects of the guardrails are quite heterogeneous by industry. In particular, 

the guardrails reduce the tax savings by 59 percent in the professional services, fnance/insurance, and 

healthcare industries. This accounts for over half of the guardrails’ total reduction in tax savings. 

The guardrails’ effects are heterogeneous for three reasons. First, and most obviously, the likelihood 

of being classifed as an SSTB varies by industry. Second, different industries have different wage and 

capital mixes. Third, the income distributions of owners also vary by industry. For example, the 

guardrails reduce the tax savings for the healthcare industry by about 70 percent, while they reduce the 

tax savings for construction by only about 20 percent. This largely refects the fact that most healthcare 

businesses are classifed in our algorithm as SSTBs. Nevertheless, industries that contain many SSTBs 

such as professional services and healthcare still see signifcant savings. This is in part because some 

sub-industries are not SSTBs (e.g., testing facilities within the broader healthcare industry) and because 

many taxpayers with SSTBs fall below the income phaseout threshold. Of note, the share of individuals 

with positive tax savings is fairly constant across industries, refecting the fact that most benefciaries 

of 199A are below the income thresholds, even if these individuals do not receive the bulk of income 

26Because tax rates are not constant, this calculation requires a “stacking” assumption. In particular, we calculate tax savings 

for the top two highest-QBI S corporations and partnerships frst. Then we calculate tax savings for the “all other K1s” category, 

reported in the table as “Undetermined S Corp / part”, against the lower remaining income. We continue this process for Schedule 

C businesses, Schedule E rental, Schedule E royalties, and Schedule F farming, in that order. 27Like Table 5, this table requires a stacking assumption. We follow the same order as in Table 5. Within S corporations/partnerships and Schedule C businesses, we use the largest of that type, followed by the second largest, followed by 

the residual. 

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17 
affected by 199A. 

IV Conclusion 

This paper presents preliminary evidence on the pass-through deduction created by the Tax Cuts and 

Jobs Act. In 2016, roughly 37 million tax units reported nonzero pass-through income. Of these, about 

29 million had at least one pass-through business with positive income. Our analysis suggests that the 

majority of the latter group (around 17.8 million) would have been eligible for the pass-through deduction had it applied. After adjusting 2016 taxable income to account for the largest provisions of TCJA 

and applying 2018 tax rates, we estimate the aggregate tax savings to be $34.5 billion (measured in 

2018 dollars). The tax savings would be nearly twice as large – $62.9 billion – but for the limitations 

included in Section 199A, including the guardrails that curtail the deduction for some high-income taxpayers. In the steady state, the no-behavior tax savings would be further reduced, as prior-year negative 

QBI carryforwards would offset some of current-year QBI. Assuming that half of these carryforwards 

would ultimately offset future QBI for taxpayers with marginal tax rates of 32 percent, we arrive at a 

crude estimate of steady-state no-behavior tax savings of $25.8 billion. 

Because pass-through income is relatively concentrated among high-income taxpayers, the tax savings from 199A are also relatively concentrated. Taxpayers at or above the 95th percentile of income 

earn 60 percent of the business income and are estimated to receive 72 percent of the benefts. The bulk 

of the savings accrue to taxpayers with S corporation, Schedule C, or partnership income. Estimated 

tax savings are largest in professional services, real estate, construction, retail and wholesale trade, and 

manufacturing, and the effects of the guardrails are heterogeneous across industries. 

The introduction of the 199A deduction has the potential to increase total pass-through income via 

a combination of expanding economic activity and shifting economic activity into pass-through form. 

Real responses could include entry of new pass-through businesses (Gentry and Hubbard, 2000, 2005), 

more risk-taking in existing businesses due to asymmetric treatment of gains and losses (Cullen and 

Gordon, 2007), and increased investment. Additionally, the profts of many pass-through businesses 

are derived in large part from the labor supply of their owners (Smith et al., 2017); thus, Section 199A 

could affect pass-through income by increasing the labor supply of owners (Keane, 2011). Options 

for shifting income to take advantage of the pass-through deduction include reclassifcation of existing 

employment relationships as independent contracting relationships, and adjustments to the split between wage compensation (guaranteed payments) and business income for active S corporation owners 

(partners). 

The rules governing the deduction create a number of cutoffs and limitations which may enable 

identifcation of these behavioral responses. In addition, they create their own incentives for real and 

shifting responses. For example, high-income business owners may increase wage payments or acquire 

tangible property in order to avoid limitations on the 199A deduction. In future work, we plan to study 

these issues as well as the behavior induced by the broader 199A incentives discussed above to gain a 

deeper understanding of how taxpayers respond to this provision. 

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May 2019

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