Friday, August 6, 2021
Senate Finance Committee Chair Ron Wyden (D-OR) has introduced legislation to overhaul the 20 percent deduction for pass-through income introduced into US tax law in 2017.
The deduction – also called the Section 199A deduction – allows individuals to deduct up to 20 percent of their qualified business income (QBI), plus 20 percent of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income. Income earned by a C corporation or income earned providing services as an employee isn't eligible.
Several services sector businesses are also excluded. Excluded activities include: health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, investing and investment management, trading, dealing in certain assets, or a business centered on the reputation or skill of one or more of its employees or owners.
A summary of the bill, released by Wyden, says: "Republican's 2017 tax law included a 20 percent deduction for certain income from pass-through businesses, which significantly lowered the marginal income tax rate on qualifying pass-through business income. A high earning individual taxed at 37 percent saw a 7.4 percent rate slash on their pass-through business income thanks to this deduction. The deduction was inaccurately sold as 'tax relief for Main Street,' when in reality, 61 percent of the benefit goes to the top one percent. Making matters worse, arbitrary industry carve outs and limitations excluded some small business owners and left the IRS with a tangled mess of calculations."
Wyden said: "The Small Business Tax Fairness Act would ensure the pass through deduction helps Main Street small business owners, not wealthy real estate investors."
He said he is proposing to expand eligibility for middle-income services business owners, "by removing arbitrary restrictions on which industries qualify and which don't." The bill would also simplify the calculations for Main Street businesses to determine their deduction. He has proposed that small business owners would no longer have to calculate their deduction using formulas and limitations based on W-2 wages paid and qualified investments.
"The deduction's multiple caps and thresholds make calculating the deduction and determining eligibility unnecessarily complicated. The bill would establish one threshold for determining whether the taxpayer gets the deduction and one simple definition of qualified business income that applies to all taxpayers," Wyden said.