2026 Section 199A: Proprietorship or S Corporation?

If you operate as a sole proprietor or single-member LLC, earn a good income, and have no payroll and little depreciable property, you may be losing most of the Section 199A 20 percent deduction. Switching to an S corporation can fix that.

Why Your Section 199A Deduction Disappears Without Payroll

Here is the problem: Once your 2026 taxable income exceeds $276,750 (single) or $553,500 (married), the deduction depends on your W-2 wages or your depreciable property. With no payroll and no property, your deduction collapses to the new $400 statutory minimum, no matter how profitable the business is.

How an S Corp Election Unlocks the 199A Deduction

Consider a single taxpayer with $400,000 of proprietorship net income and $370,000 of taxable income, not in an out-of-favor specified service field. As a proprietor, the taxpayer receives the Section 199A deduction of $400. But what if that same taxpayer incorporates, elects S corporation status, and takes a reasonable salary of $100,000? Two things happen. First, payroll taxes drop. For the proprietorship, self-employment tax plus the additional Medicare tax runs about $35,116. With the S corporation, payroll taxes on the $100,000 salary run roughly $15,800—a savings of about $19,316. Second, the salary creates W-2 wages, which unlocks the deduction. The calculation produces a $50,000 deduction, worth about $17,500 in the 35 percent bracket. Together, the switch adds roughly $36,676 of after-tax cash. And because Congress repealed the Section 199A sunset, this is now an every-year result rather than a temporary one.

Two Cautions Before You Switch

Two cautions: This strategy does not help if you are in an out-of-favor specified service business—doctors, lawyers, accountants, and similar fields. And the salary must be reasonable based on your facts.

How We Can Help

Sterling Tax and Accounting is here to help your business with tax planning!  Our comprehensive approach to tax planning helps reduce your overall tax liability and keep more money in your pocket.  If all your accountant does is file your taxes, chances are they are making you pay more than your fair share of taxes. Learn how to proactively save on taxes by scheduling a call with our tax planning specialists. Our tax planning, accounting & business services help you stay on track. Sterling Tax & Accounting will work with you to optimize your business and minimize your taxes. We will work to provide you and your business with the tools and resources you need to build a solid tax and business foundation. We’re a trusted CPA Firm in Sarasota, Florida. We serve clients all over the US, and proactively work to minimize their taxes. Welcome to the Sterling Standard of business!  Want to learn more?  Schedule a meeting with our tax planning team.