President Donald Trump’s signature tax and spending legislation contained major changes for clients — from ultra-wealthy business owners to mass affluent investors.
To help financial advisors get up to speed on the new law, ThinkAdvisor recently hosted a discussion featuring Robert Bloink and William H. Byrnes. The taxation professors covered a lot of ground, highlighting the business income taxation framework established under Section 199A of the Tax Code.
As the duo explained, Trump’s tax reform legislation in 2017 created a 20% deduction for qualified business income. This deduction for “pass-through entities” was set to expire after 2025, along with many of the 2017 provisions.
The new law makes the 20% 199A deduction permanent, much to the delight of the business-owner community. However, as the professors emphasized, the 20% QBI deduction remains subject to key limitations.
As a result, it’s important for advisors and their clients to maintain compliance with the rules in Section 199A, especially as key threshold amounts are adjusted over time to account for inflation, they noted.
Digging Into Section 199A
According to the professors, the QBI deduction limitations generally do not apply to taxpayers whose earnings do not exceed an inflation-adjusted income threshold. After their income exceeds the relevant threshold, taxpayers are subject to a phase-out of the QBI deduction “in proportion of excess earnings above the threshold.”
Beginning in 2026, the legislation increases the phase-out range, which now starts at $75,000 for single filers and $150,000 for joint returns. For 2025, the deduction’s phase-out is reached at $494,600 for a couple filing jointly, which is half that of a single filer.
“Applying an estimated 2.8% inflation adjustment to 2026’s thresholds, the income threshold for a married couple rises to $405,648 — and the complete phase-out is not reached until $555,648 — making for a $61,000 bump to the phase out range,” Byrnes said.
If the 20% deduction is fully used, the professors noted, it effectively reduces the individual’s highest marginal tax rate of 37% to 29.6% for qualified business income. Plus, regardless of whether a taxpayer exceeds the phase-out threshold, the new law guarantees a minimum QBI deduction of $400 — as long as the taxpayer earns at least $1,000 of QBI.
Who Can Claim the Deduction?
As the professors observed, the 20% QBI deduction was created with a limitation based on the type of business income the taxpayer earns — and the limitations still apply. Specifically, “service businesses” face significant restrictions in using the deduction, although there are special situations where that is not the case.
“Income of professionals like financial advisors, accountants and lawyers was excluded from the QBI deduction,” Byrnes said. “However, the limitations don’t apply if a taxpayer’s taxable income does not exceed an annually inflation-adjusted income threshold. The new law beneficially raises the income threshold and how it is applied as of Jan. 1 of next year.”
Because the deduction is so valuable, the professors agreed, entities that are classified as service businesses should aim to reduce taxable income to below the applicable thresholds, if possible.
That will be a challenge for many taxpayers, but there are options — such as making larger contributions to retirement plans that can play a significant role in allowing even service business owners to maximize the value of the deduction.
More Insights
Also covered by the two tax experts were rules applying to “bonus depreciation,” which let businesses deduct a higher proportion of the cost of qualified assets during the first year they’re placed in service. As the professors pointed out, the deductible amount has changed from year to year.
“The 2017 [tax law] restored 100% first-year bonus depreciation, but only on a temporary basis,” Bloink said. “The permissible rate of bonus depreciation phased-out over a 10-year period of time. 100% bonus depreciation was permitted between Sept. 27, 2017, and Dec. 31, 2022.”
Under the new legislation, bonus depreciation in year-one is again increased to 100%. What’s more, the provision is permanent, applying to qualified property that is acquired and placed into service on or after Jan. 20, 2025.
The law also created an elective 100% depreciation deduction allowed for certain “qualified production property." This elective additional deduction is temporary and allowed only through 2030.
(Shown in photo: Robert Bloink and William H. Byrnes)
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