8598 / How does the owner or beneficiary of a trust or estate calculate his or her QBI deduction under the Section 199A regulations?

Trust or estate beneficiaries take any QBI, W-2 wages or UBIA of qualified property into account in the same manner as though the trust or estate were any other relevant pass-through entity. However, the regulations make clear that trusts formed with a significant purpose of taking advantage of the Section 199A deduction will not be respected.¹

The trust or estate is treated as a relevant pass-through entity to the extent it allocates QBI and other items to beneficiaries, and is treated as an individual to the extent it retains QBI and other items.² If the trust is a grantor trust, the person owning the trust calculates his or her Section 199A deduction as though he or she directly conducted the relevant activities of the trust.³

If the trust is a non-grantor trust, QBI, W-2 wages, UBIA of qualified property, qualified REIT dividends and qualified PTP income must be calculated at the entity level. Those items are then allocated to beneficiaries (and/or to the trust or estate) in proportion to the trust or estate’s distributable net income (DNI) for the taxable year that is either distributed to the beneficiaries or retained by the entity. DNI is calculated without regard to Section 199A, but does take into account the separate share rule of IRC Section 663(c). If the trust or estate has no DNI for the year, all items are allocated to the trust or estate.⁴

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Planning Point: The relevant income threshold for Section 199A deduction purposes is $197,300 in 2025 for trusts and estates, $191,950 in 2024, $182,100 in 2023, $170,040 in 2022 and $164,900 in 2021 (i.e., the same income threshold that applies to single filers).⁵

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The regulations also clarify that an electing small business trust (ESBT) is entitled to take the Section 199A deduction. The S portion of the ESBT is required to take into account QBI and all other items of any S corporation owned by the ESBT. The grantor portion of the ESBT must take into account QBI and other items from assets treated as owned by the grantor or another person. The non-S portion of the ESBT must take into account any QBI and other items owned by the ESBT.⁶