Democrats Take Aim at Pass-Through Deduction for Businesses

Filed in Advocacy, Tax Reform by on August 11, 2021 3 Comments

Democrats Take Aim at Pass-Through Deduction for BusinessesSenate Finance Committee Chairman Ron Wyden recently introduced a bill that would make several changes to section 199A of the tax code, which provides many owners of sole proprietorships, partnerships, S corporations, and some trusts and estates a deduction of income from a qualified trade or business.

The 20% pass-through deduction — also known as the qualified business income deduction — was implemented by the Tax Reform and Jobs Act in late 2017 to provide qualifying “pass-through” business owners a tax deduction equal to 20% of qualifying business income (subject to limitations).

NAHB supported the creation of this deduction as a means to provide parity between the lower corporate tax rate and the higher individual rates pass-through businesses face.

Sen. Wyden’s bill includes the following key changes:

  • Elimination of trusts and estates as qualifying businesses. Under current law, trusts and estates that function as a business may be eligible for the 199A deduction so long as income is “qualified business income” (QBI). The Wyden bill would narrow eligibility so that it excludes trusts and estates.
  • Deduction fully phased out once taxable income reaches $500,000. The QBI deduction currently has an income threshold of roughly $320,000, above which the deduction begins to phase out over the next $100,000. However, current law includes another eligibility criterion based on W-2 wages paid to employees and the business’s basis in owned property. The bill eliminates the W-2 wages/basis test and changes the current income threshold to $400,000. A taxpayer’s QBI deduction would fall to zero once their income reaches $500,000.
  • Married individuals must file separately. If a married taxpayer or their spouse is taking the 199A deduction for a given tax year, the couple loses the “married filing jointly” option. Rather, each taxpayer must file taxes separately.

As Democrats begin to assemble their large tax proposal this fall, NAHB anticipates changes to 199A will be among those that are considered. In June, NAHB joined more than 100 business groups in a letter to Congress opposing any reduction or repeal of this deduction. We will continue to engage with Congress as lawmakers assemble their tax plan.

Sen. Wyden’s office has said the bill would generate $147 billion over 10 years.  Section 199A is scheduled to expire after 2025.

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Comments (3)

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  1. Stop being part of the problem. Real estate is already the most highly tax favored investment. Our communal life as a nation requires more equal treatment with fewer tax loopholes and favorites hidden away.

  2. Duane Thompson says:

    Real estate in my area is one of the most highly taxed assets you can own. The value is taxed every year and every transaction is taxed with a transfer tax. Renters are the ones who get by with minimal taxes. The landlord pays tax on the same property every year they own it, pay capitol gains if they make money on the sale, and real estate transfer taxes on every sale. Politicians, lawyers, non profits, and government contractors are the most favored when it comes to paying taxes.

  3. Marvin Bergevin says:

    Economics 101 exposes taxes on business as equivalent to a hidden sales tax to the general public. When taxes are raised, the business has to pass the cost on to its customers to preserve its life by remaining profitable. Taxes are no different than any other cost of doing business like labor, energy ,etc. Claiming that raising taxes means business will “be paying its fair share” is at best misleading and at worst dishonest. Consumers end up paying the hidden taxes in the form of increased costs for goods and services. Most consumers are led to misidentify that increase as inflation or profiteering, rather than as a sales tax purposely hidden by those writing tax policy.

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