The Section 199A QBI Deduction for Cross-Border Filers: Domestic Business Income Only, and Why Most Canadians Don't Qualify

Section 199A gives non-corporate taxpayers a deduction of up to 20% of qualified business income from a US trade or business, subject to limits based on wages, property, and the type of business. The 2025 tax law made the deduction permanent and adjusted the phase-in ranges. For cross-border filers, one condition decides everything: the income must be effectively connected with the conduct of a trade or business within the United States. Foreign business income does not qualify, however it is earned and whoever earns it. A US citizen running a business in Canada gets nothing; a Canadian running a business through a US permanent establishment can get it on the US-source portion.

Key takeaways

• The deduction: 20% of qualified business income (net income from a domestic sole proprietorship, partnership, S corporation, or rental activity that rises to a trade or business), plus 20% of qualified REIT dividends and PTP income, limited to 20% of taxable income less net capital gain. Made permanent by the 2025 tax law, with a minimum deduction of $400 for taxpayers with at least $1,000 of QBI from active businesses.
• Domestic only: QBI includes only items effectively connected with a US trade or business under section 864(c). Income from a business conducted outside the US is excluded.
• Specified service trades or businesses (health, law, accounting, consulting, financial services, performing arts, athletics, and any business whose principal asset is the reputation or skill of its owners): the deduction phases out above a taxable income threshold (about $197,000 single / $394,000 joint for 2025, with wider phase-in ranges under the 2025 law).
• Wage and property limits: above the threshold, the deduction is capped at the greater of 50% of W-2 wages paid or 25% of wages plus 2.5% of the unadjusted basis of qualified property, for non-SSTB businesses.
• Who qualifies cross-border: a Canadian resident with a US permanent establishment (effectively connected income on a 1040-NR); a US resident (including a Canadian who moved) with a US business; a US citizen in Canada with US-source business income from a US trade or business. Who does not: a US citizen in Canada with a Canadian business; a Canadian consultant serving US clients from Canada with no US fixed base; a Canadian corporation (no pass-through).

The domestic requirement

QBI is defined as the net amount of qualified items of income, gain, deduction, and loss with respect to a qualified trade or business, and qualified items include only those effectively connected with the conduct of a trade or business within the United States. A US citizen who runs a consulting practice from Toronto has business income sourced to Canada and not effectively connected with a US trade or business; no QBI, no deduction. The same US citizen who flies to New York and performs services there has US-source income for those days, which can be effectively connected income if the activity rises to a US trade or business, and that portion can be QBI.

A Canadian resident who is a non-resident alien has QBI only if they are engaged in a US trade or business and the income is effectively connected: a Canadian with a US permanent establishment (an office, a fixed base) files a 1040-NR on the ECI and can claim the section 199A deduction on it. A Canadian consultant with US clients but no US fixed base is exempt from US tax under Article VII, files a 1040-NR with Form 8833 to claim the exemption, and has no ECI and no QBI.

Rental income qualifies as QBI only if the rental activity rises to a trade or business (the IRS safe harbor requires 250 hours of rental services a year); a Canadian with a Florida condo under the 871(d) election has ECI by election, but a single passive rental rarely meets the trade-or-business standard.

The SSTB limits

For a specified service trade or business, the deduction phases out as taxable income rises above the threshold and disappears above the phase-in range. Most cross-border professionals (physicians, lawyers, accountants, consultants, financial advisors) are SSTBs. A Canadian physician who moves to Texas and practices through a US S corporation or sole proprietorship gets the deduction only if taxable income is below the threshold; above it, nothing.

The wage and property limits

Non-SSTB businesses above the threshold are limited to the greater of 50% of the business's W-2 wages or 25% of wages plus 2.5% of qualified property basis. A business with no US employees and no US property (a Canadian's US business run remotely) has a zero limit above the threshold.

The 2025 changes

The 2025 tax law made section 199A permanent (it was scheduled to expire after 2025), widened the phase-in ranges for the SSTB and wage limits, and added a minimum $400 deduction for taxpayers with at least $1,000 of QBI from businesses in which they materially participate.

Entity interaction

A Canadian who moves to the US and forms an LLC or S corporation for a US business has pass-through income eligible for QBI (subject to the limits). A Canadian who keeps a Canadian corporation for the US business has corporate income taxed at 21% federally and no QBI (the deduction is for non-corporate taxpayers). A C corporation is often still preferable for a Canadian-resident owner because of the LLC trap, but for a US-resident owner the pass-through with QBI can produce a lower effective rate on business income than a C corporation with a second tax on dividends.

Worked example

Three consultants each earn $150,000 of net business income.

• A US citizen in Toronto serving U.S. and Canadian clients from Toronto. Income is foreign-source (services performed in Canada); no ECI; no QBI; no deduction. The income is taxed in Canada and reported on the 1040 with a foreign tax credit.
• A Toronto resident serving US clients from Toronto with no US office. Exempt under Article VII; 1040-NR with Form 8833; no ECI; no QBI. Taxed in Canada only.
• A Canadian who moved to Austin and consults through a Texas LLC. US trade or business; $150,000 of QBI; taxable income below the SSTB threshold; deduction of $30,000 (20%); federal tax saving about $7,000; no Texas tax.

Official sources

"The deduction allows eligible taxpayers to deduct up to 20 percent of their QBI." QBI does not include "income that is not effectively connected with the conduct of business within the United States." — Internal Revenue Service, Qualified Business Income Deduction, https://www.irs.gov/newsroom/qualified-business-income-deduction

Practitioner note

Section 199A is the deduction Canadians who move to the US should know about and Americans in Canada should stop asking about. It applies to US business income only, so the Canadian consultant with US clients has none until they have a US fixed base, and the US citizen in Canada has none at all. For the Canadian who has moved and set up a US pass-through, it is worth several thousand dollars a year and it belongs in the entity decision.

See also: Planning a move? Start with the Canada-to-US tax checklist and browse every corridor by city, province, and state.

Next step

Fairlight prepares the section 199A analysis for cross-border business owners, the entity choice where the deduction matters, and the US return claiming it on effectively connected income. See cross-border pricing or book a call.