Proposed Bill Would Modify Tax Deductions for Eligible Owners of Pass-Through Entities
A new bill introduced by Senate Finance Committee Chairman Ron Wyden (D-OR), the Small Business Tax Fairness Act, would streamline the Section 199A QBI deduction, removing the distinction between “qualified” businesses and certain businesses providing personal services, known as “specified service trades or businesses” (SSTBs). At the same time, the bill would raise the income limit under which eligibility for the deduction begins to phase out.
Currently, the QBI deduction begins to phase out for eligible owners of pass-through SSTBs with incomes above $315,000 (if Married Filing Jointly, indexed for inflation), with the deduction fully phased out for such owners with incomes in excess of $415,000. The proposed bill would increase the phase-out range, starting at $400,000 with a full phase-out at $500,000. With the distinction between “qualified” businesses and SSTBs removed, the phase-out would apply to all eligible pass-through business owners.
The 199A QBI deduction originated as part of 2017’s Tax Cuts and Jobs Act and provides noncorporate owners of qualified pass-through entities with a 20% federal tax deduction. Under current law, the deduction is subject to a number of limitations and excludes owners of certain pass-through entities such as accountants, doctors, lawyers, and financial advisors (SSTBs) who earn over $415,000 (indexed for inflation). The proposed change would remove some of these limitations, expanding applicability of the deduction to pass-through owners engaged in specified service trades or businesses, as long as their income is below $500,000.
Additionally, the bill would limit the deduction to individual owners of pass-through entities, excluding estates and trusts, which were previously eligible to claim the deduction. The combination of this and the new phase out on the deduction for non-SSTBs noted above means many wealthy business owners could see an increase in their taxes.
MFA’s Tax Team will continue to monitor developments related to the Small Business Tax Fairness Act and its impact to customers. In the meantime, please don’t hesitate to connect with a member of our Tax Team to discuss potential implications for your unique tax scenario.
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