How Section 199A Permanency Impacts A&E Firm Tax Opportunities

Overview

Congress permanently extended the qualified business income (QBI) deduction under Section 199A of the Internal Revenue Code (IRC) as part of P.L. 199-21, commonly known as the “One Big Beautiful Bill Act” (OBBBA), which President Donald Trump signed into law on July 4, 2025. For architecture and engineering (A&E) firms, this development carries particular significance.

Unlike many other professional service businesses, A&E firms are excluded from the specified service trade or business (SSTB) limitation that otherwise caps or eliminates the deduction for high-earning owners. With the deduction now permanent rather than scheduled to expire, A&E firms organized as pass-through entities — partnerships, S corporations and sole proprietorships — have a durable, long-term opportunity to reduce the effective tax rate on QBI.

Section 199A: Origins Under the Tax Cuts and Jobs Act

Section 199A was introduced by the Tax Cuts and Jobs Act (TCJA) of 2017, P.L. 115-97, effective for tax years beginning after 2017. The provision allows owners of sole proprietorships, partnerships, S corporations, and certain trusts and estates to deduct up to 20% of QBI earned from a qualified trade or business. This is an “extra” deduction on top of other business expenses. QBI generally includes the net amount of income and loss from a domestic trade or business but excludes investment income and compensation paid to an owner.

There are certain thresholds which can limit the 20% deduction to eligible taxpayers. For some taxpayers with taxable income below an inflation adjusted threshold, there is no limitation on the deduction. This is called the phase-out range. For 2026, that amount is $403,500 to $553,500 if filing jointly. For all other taxpayers, that range is $201,750 – $276,750. For those above that range, additional constraints apply: a wage and capital limitation, and, for certain service businesses, the SSTB limitation described below.

The wage and capital limitation caps the deduction at the greater of 50% of W-2 wages paid by the business, or 25% of W-2 wages plus 2.5% of the unadjusted basis of qualified property. This limitation ties the benefit to businesses that employ workers or invest in productive assets, rather than businesses built primarily around a single owner’s labor.

As enacted in 2017, Section 199A was scheduled to sunset after December 31, 2025, along with many of the individual tax provisions of the TCJA. That sunset created years of planning uncertainty for pass-through business owners, who could not be confident the deduction would survive past 2025.

The Specified Service Trade or Business Limitation

The TCJA also built a second, more restrictive limitation into Section 199A for owners of specified service trades or businesses, commonly called SSTBs. The SSTB category covers fields such as health, law, accounting, consulting, athletics, financial services and brokerage services, along with any trade or business where the principal asset is the reputation or skill of one or more of its employees or owners (such as name, imagine and likeness income).

For an SSTB owner with taxable income above the inflation adjusted threshold, the Section 199A deduction is eliminated entirely, regardless of wages paid or property owned by the business. Between the lower and upper thresholds, the deduction phases out proportionally. This limitation was intended to prevent high-income professionals from restructuring consulting services or business income as pass-through income solely to capture the deduction.

The OBBBA widened the phase-in range for both the wage and capital limitation and the SSTB limitation. This change gives SSTB and non-SSTB owners alike more room to retain some deduction before it phases down or out. Even so, once an SSTB owner’s income clears the upper threshold, the deduction disappears.

The A&E Exception: A Structural Advantage

Engineering and architecture services occupy a distinctive position within Section 199A. When Congress defined the SSTB category, it incorporated the list of service fields identified in Section 1202(e)(3)(A), such as health, law and consulting, along with a broader test that catches any business whose principal asset is the reputation or skill of its employees. Engineering and architecture services are explicitly excluded from that definition. As a result, A&E firms are not treated as SSTBs under Section 199A, even though they are professional service businesses whose value depends heavily on the technical judgment of their licensed professionals.

This distinction matters because it removes the income-based cliff that governs SSTBs. An A&E firm owner whose taxable income exceeds the upper threshold does not lose the Section 199A deduction outright, the way a lawyer, physician or consultant would. The firm’s deduction instead continues to be governed only by the wage and capital limitations described above. A well-staffed A&E firm that pays meaningful W-2 wages, or that holds meaningful basis in equipment, software and other qualified property, can continue to claim a substantial deduction even at high income levels.

At higher income levels, an A&E firm can generate a substantial Section 199A deduction because A&E is excluded from the SSTB rules, while another service business such as a law firm with the same income may lose the deduction entirely due to the SSTB limitation. Below is an example showing the benefit:

A&E firms should not assume, simply because they provide professional services, that the SSTB limitation applies to them. For most A&E firms, it does not.

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Permanent Under the One Big Beautiful Bill Act

The OBBBA’s most consequential change for A&E firms is not a new benefit, but the removal of the 2025 sunset date. Section 199A is now a permanent feature of the IRC, with no scheduled expiration. Combined with the A&E exclusion from the SSTB limitation, this permanence turns what was previously a temporary, uncertain benefit into a dependable, long-term planning assumption.
 
The OBBBA also made several other changes effective in 2026: The wage and capital phase-in ranges described above increased, and taxpayers with at least $1,000 of aggregate QBI from an active trade or business are now guaranteed a minimum deduction of $400, indexed for inflation beginning in 2027. None of these changes have altered the underlying A&E exclusion from SSTB treatment, which predates the OBBBA and remains intact.

For A&E firm owners, the practical effect is straightforward. A benefit that firms could previously use only through 2025 can now be built into long-range compensation, entity structure, and succession planning without concern that it will disappear at the end of a five or ten-year plan.

Compounding the Advantage: Other Pass-through Benefits

The Section 199A deduction is only one reason for an A&E firm to evaluate its entity structure. Firms organized as partnerships or S corporations, rather than C corporations, also gain access to other tax attributes that are unavailable, or far less favorable, outside the pass-through structure.

Tax-free Distributions

Partners and S corporation shareholders can generally receive cash distributions from the business free of additional tax, provided they have sufficient basis in their partnership interest or stock. Because pass-through income is taxed once, at the owner level, as it is earned, a later distribution of previously taxed earnings does not create a second layer of tax. By contrast, a C corporation taxes income at the entity level and again when earnings are distributed as dividends.

Tax Basis Step-up on Sales and Buy-ins

Partnerships offer a further advantage unavailable to S corporations. With a valid election under Section 754, a partnership can adjust the inside basis of its assets when a partnership interest is sold or a new partner buys in, so the incoming partner’s share of the partnership’s asset basis reflects the price paid rather than historical cost. This can meaningfully reduce the incoming partner’s future tax liability on the firm’s built-in gain. 

S corporations do not offer this inside basis adjustment, but an incoming shareholder still receives a stepped-up basis in the purchased stock itself, which reduces gain on a later sale of that stock. For A&E firms, where partner and shareholder transitions are frequent as principals retire and new owners buy in, this basis planning can be a meaningful, recurring benefit.

Pass-through Entity Tax Deductions

Pass-through entity tax (PTET) regimes create a valuable federal tax planning opportunity for owners of partnerships and S corporations by allowing state income taxes to be paid and deducted at the entity level rather than by the individual owner. In contrast, a W-2 employee generally pays state income taxes personally and can claim only a limited federal deduction for those taxes ($10,000 to $40,000 depending on income). 

When a pass-through entity elects into a state’s PTET program, the entity's state tax payment is typically treated as an ordinary business deduction for federal income tax purposes, reducing the amount of taxable income passed through to the owners while still providing the owners a corresponding state tax credit or benefit. As a result, PTET elections can effectively convert a partially limited personal tax deduction into a fully deductible business expense, often generating meaningful federal tax savings for business owners in states that offer these elections.

What A&E Firms Should Do Now

For A&E firms currently organized as C corporations, or for firms that have not recently revisited their entity structure, the permanence of Section 199A is a reason to reconsider whether pass-through treatment offers greater long-term value. The analysis should weigh the now permanent Section 199A deduction, the wage and capital limitation applicable to the firm’s specific payroll and asset base, the availability of tax-free distributions and the basis planning opportunities available to partnerships on ownership transitions.

Firms already organized as partnerships or S corporations should confirm they are structuring compensation, W-2 wages and qualified property in a way that maximizes the deduction under the wage and capital limitation, since that limitation, rather than the SSTB test, is now the primary constraint on the benefit available to A&E firms.

Because the deduction is permanent, these decisions can be made with a level of confidence that was not available before 2025. Firms considering a new entity structure, an ownership transition or a broader update to their tax planning should engage Cherry Bekaert’s tax advisors to model the effect of Section 199A alongside the other pass-through benefits addressed in this article.

Your Guide Forward

Cherry Bekaert's Professional Services industry team pairs deep A&E experience with tax-technical knowledge to help you model the QBI deduction, evaluate your entity structure and coordinate Section 199A with the other pass-through benefits discussed above. Connect with our team to explore what a permanent Section 199A means for your firm.

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© Cherry Bekaert. All Rights Reserved. This material is provided for general informational purposes only and does not constitute tax, legal or other professional advice. Firms should consult their own tax advisors regarding their specific facts and circumstances.