When it comes to saving on taxes, business owners and investors in the United States are always looking for strategies that keep more money in their pockets. One of the most talked-about provisions from the Tax Cuts and Jobs Act (TCJA) of 2017 is the Section 199A deduction, sometimes called the qualified business income (QBI) deduction or 199A dividend deduction.

This provision can be particularly powerful for investors who hold shares in real estate investment trusts (REITs), business owners who generate pass-through income, and taxpayers who want to reduce the bite of ordinary income on their returns.

But here’s the big question: Is the Section 199A dividend deduction right for you?

In this comprehensive guide, we’ll break down everything you need to know about Section 199A, including:

How the deduction works
Who qualifies
The benefits and limitations
How it applies to dividends from real estate investment trusts (REITs)
When taxpayers can claim the deduction
Situations involving payments in lieu of dividends
Whether it makes sense for your unique tax situation

By the end, you’ll be equipped to make smarter decisions about your taxes — and see how partnering with the right HR and payroll experts can give you an even bigger edge.

What Is the Section 199A Dividend Deduction?

Section 199A was introduced to help small and medium-sized businesses in the United States, as well as certain investors. The deduction allows eligible taxpayers to deduct up to 20% of qualified business income (QBI) from pass-through businesses.

Pass-through businesses include:

Sole proprietorships
Partnerships
S corporations
Some trusts and estates

But beyond business income, Section 199A also provides a valuable tax break for qualified REIT dividends and qualified publicly traded partnership (PTP) income.

This means you don’t have to own a business to benefit. If you invest in real estate investment trusts (REITs), you may qualify for the 199A dividend deduction as well.

Why Was Section 199A Created?

Before the TCJA, pass-through entities were taxed at individual rates, which often placed them at a disadvantage compared to corporations, especially after corporate tax rates were slashed to 21%.

The 199A deduction was designed to “level the playing field” by giving small businesses and investors in REITs a way to lower their taxable ordinary income.

For investors, the REIT provision was especially significant. Since REITs must pay out at least 90% of taxable income as dividends, don t need to itemize deductions to qualify, shareholders often received dividends taxed at higher ordinary rates, rather than the lower qualified dividend rates. Section 199A helped reduce that tax burden.

How the Deduction Works for REIT Dividends

Let’s say you own shares of a real estate investment trust (REIT). The REIT pays you dividends throughout the year. Many of these dividends are non-qualified, meaning they’re taxed at your regular ordinary income tax rate, not the lower long-term capital gains rate.

Here’s where Section 199A comes in:

Taxpayers can claim the deduction for 20% of qualified REIT dividends.
This deduction applies whether or not you itemize deductions. That’s right — even if you take the standard deduction, you can still benefit.

Example:

Suppose your REIT pays you $10,000 in dividends. Normally, you would pay taxes on the full $10,000 at your ordinary rate. With Section 199A, you may deduct 20%, or $2,000, reducing the taxable portion to $8,000.

That’s a substantial savings, especially if you’re in a high tax bracket.

Who Qualifies for the 199A Dividend Deduction?

Not everyone can take advantage of Section 199A. Here are the key rules:

You must be a U.S. taxpayer. The deduction is available only in the United States.
You must receive qualified income. This includes QBI from pass-through businesses or qualified dividends from REITs.
Taxable income limits apply. For 2025, the income threshold is around $383,900 for joint filers and $191,950 for single filers (these amounts adjust annually). Above these levels, restrictions may reduce or eliminate your deduction.
You don’t need to itemize deductions. This makes it easier for more taxpayers to qualify.

The Role of REITs: Why They Matter

Real estate investment trusts (REITs) are companies that own, operate, or finance income-producing real estate. They allow everyday investors to gain exposure to real estate without directly buying properties.

Types of REITs include:

Equity REITs (own properties)
Mortgage REITs (finance property debt)
Hybrid REITs (a mix of both)

Investors love REITs because they typically pay high dividends. But here’s the catch: most REIT dividends are taxed as ordinary income. Without Section 199A, that means higher taxes.

The 199A dividend deduction gives REIT investors a unique advantage — a built-in tax break.

Payments in Lieu of Dividends

There’s an important detail to keep in mind: payments in lieu of dividends.

These are substitute payments you might receive if you hold REIT shares (or other dividend-paying stocks) in a margin account where the broker has lent out your shares.

Unfortunately, payments in lieu of dividends do not qualify for the Section 199A dividend deduction. Only qualified REIT dividends reported on your Form 1099-DIV are eligible.

This is a common pitfall for investors, so make sure you understand whether you’re receiving actual dividends or substitute payments.

Section 199A vs. Itemized Deductions

One of the most attractive features of Section 199A is that you don’t have to itemize deductions to take advantage of it.

Historically, many tax breaks were tied to itemization — such as mortgage interest, state and local taxes, and charitable contributions. After the TCJA raised the standard deduction, fewer taxpayers benefited from itemizing.

But the 199A deduction is different:

You can claim it even if you take the standard deduction.
It’s a “below-the-line” deduction, applied after adjusted gross income (AGI).
This makes it accessible to a much larger group of taxpayers.

Limitations and Phase-Outs

Like most tax breaks, Section 199A comes with limitations. Here are some things to watch out for:

Income Thresholds:
- For higher earners, especially those in specified service trades or businesses (SSTBs), the deduction may phase out.
- SSTBs include fields like law, accounting, health, consulting, and financial services.
Wage and Property Limitations:
- At higher income levels, the deduction may be limited to 50% of W-2 wages paid by the business or 25% of wages plus 2.5% of qualified property.
Non-Qualified Income:
- Investment income such as capital gains, interest, and foreign dividends typically don’t qualify.
Payments in Lieu of Dividends:
- As mentioned, these are excluded from eligibility.

Estate Investment Trusts (REITs) and Estate Planning

Another area where Section 199A plays a role is in estate planning. Some investors hold REITs within trusts or estates.

Here’s the good news: estate investment trusts REITs can also generate qualified dividends that are eligible for the deduction. If you manage wealth through a trust or inherited assets, this provision may lower the overall tax liability for the estate or its beneficiaries.

Strategic Tax Planning: Making the Most of Section 199A

If you think the 199A deduction could benefit you, here are some strategies to consider:

Review your REIT investments: Make sure dividends qualify and aren’t substitute payments.
Understand your income bracket: The value of the deduction depends on whether you fall below or above the threshold.
Coordinate with business income: If you own both a pass-through business and REIT shares, align your tax planning to maximize benefits.
Consult with experts: Tax laws are complex, and professional advice ensures you don’t miss out.

How Section 199A Fits Into a Bigger Picture

While the 199A deduction can reduce taxes, it’s only one piece of the puzzle. Your overall tax strategy should consider:

Long-term investment goals
Retirement accounts (401(k), IRA, etc.)
Charitable giving strategies
Whether you itemize deductions or take the standard deduction
Estate planning needs

This is where outsourcing HR, payroll, and compliance can free you up to focus on growing wealth while staying compliant. At NetPEO, we’ve seen firsthand how the right business and financial strategies work hand in hand.

Example Scenarios

Let’s break down how the deduction works in real-life cases:

Scenario 1: The REIT Investor

Sarah earns $100,000 in wages and $15,000 in REIT dividends.
Without Section 199A, her $15,000 is taxed at her ordinary income rate.
With 199A, she deducts $3,000 (20%), paying taxes on only $12,000.

Scenario 2: The Small Business Owner

Carlos owns an S corporation that earns $200,000 in QBI.
He also invests in REITs, receiving $8,000 in dividends.
With Section 199A, he deducts $40,000 from QBI and $1,600 from REIT dividends — a total deduction of $41,600.

Scenario 3: The High-Income Professional

Lisa, a lawyer, earns $500,000 from her practice (an SSTB) and $20,000 from REITs.
Her business income may not qualify due to income limits, but her REIT dividends may still be eligible for the 20% deduction.

Common Misconceptions About Section 199A

“I need to itemize deductions to qualify.”

False — the 199A deduction is available regardless of whether you itemize deductions.
“All dividends qualify.”

Not true — only qualified REIT dividends (not payments in lieu of dividends) are eligible.
“It’s permanent.”

No — the deduction is set to expire after 2025 unless Congress extends it.

Why This Matters for Business Owners and Investors

The Section 199A deduction is more than just a tax break. It’s a strategic tool that:

Reduces taxable ordinary income
Makes REITs more attractive to investors
Levels the playing field between small businesses and corporations
Encourages investment in real estate and pass-through entities

For business owners, every dollar saved on taxes is a dollar that can be reinvested into growth. For investors, it means higher after-tax returns.

Should You Claim the 199A Dividend Deduction?

Ultimately, the decision comes down to your unique financial situation:

Do you own or invest in real estate investment trusts?
Do you earn qualified business income from a pass-through?
Is your taxable income below the phase-out thresholds?
Are you receiving true dividends, not substitute payments in lieu of dividends?

If you answered “yes” to most of these, the deduction is likely right for you.

How NetPEO Helps Business Owners Like You

At NetPEO, we know that tax strategy, HR management, and payroll solutions are all connected. While we aren’t tax preparers, we work with business owners every day to:

Reduce administrative burdens
Simplify compliance
Partner with top PEO providers across the United States
Give entrepreneurs time back to focus on growth

When your HR and payroll are streamlined, you can better coordinate with tax professionals to take advantage of deductions like Section 199A.

That’s where NetPEO comes in — helping you connect with the right provider to maximize efficiency and savings.

Key Takeaways

Section 199A allows eligible taxpayers to deduct up to 20% of qualified business income and REIT dividends.
You don’t need to itemize deductions to benefit.
Taxpayers can claim the deduction on REIT dividends, but not on payments in lieu of dividends.
The deduction reduces the impact of ordinary income taxes on REIT investors and business owners.
Estate investment trusts REITs may also qualify, making this valuable for estate planning.
The provision is set to expire after 2025 unless extended.

Final Thoughts

So, is the Section 199A dividend deduction right for you?

If you’re a U.S. taxpayer earning income from pass-through businesses or investing in real estate investment trusts, the answer may be yes. The deduction offers a significant way to lower taxes, improve after-tax returns, and keep more of your hard-earned money.

But every situation is unique. The smartest move is to review your income, your investments, and your goals with a tax advisor — while also ensuring your business operations run smoothly.

At NetPEO, we help business owners like you focus on growth by connecting you with the best PEO solutions in the United States. That way, you can spend less time buried in HR and compliance, and more time leveraging opportunities like the Section 199A dividend deduction.

👉 Ready to see how NetPEO can help you streamline HR and payroll so you can focus on maximizing deductions and growing your wealth?

Fill out the form on the side & get your free PEO Quote.

Is the Section 199A Dividend Deduction Right for You?