New legislation, the Small Business Tax Cut Act, would increase the Section 199A deduction for qualified business income from 20% to 23%.
H.R. 8415 "lowers taxes for millions of small businesses, farmers, and independent professionals by expanding the qualified business income deduction," Rep. David Kustoff, R-Tenn., the bill's sponsor, said in a statement.
The deduction, found in Section 199A of the Internal Revenue Code, appplies to pass-through business structures, like sole proprietorships, S-corporations and limited liability companies, that do not pay their own income taxes but "pass through" their income to their owners' personal tax returns.
As it stands, the deduction allows eligible taxpayers to deduct up to 20% of their QBI, plus 20% of qualified real estate investment trust dividends and qualified publicly traded partnership income, according to the IRS.
While the legislation is unlikely to go anywhere right now, "it could be included in a third reconciliation bill later this year (before the midterms)," Jeff Bush of The Washington Update said in an email.
Most financial advisors are not eligible for the QBI deduction, and the bill is not likely to change that, he said.
The advisory industry "is a mix of employee/employer, W2 relationships like the wirehouses and 1099 advisors that are independent contractors," Bush explained. "The 1099 advisors may or may not be eligible for the 199A deduction. It really depends if they own other businesses."
The 2017 tax overhaul, which created the deduction, contains an exclusion of certain businesses from accessing the 199A deduction, Bush said. The One Big Beautiful Bill Act continues the limitation.
"Professionals such as attorneys, accountants, athletes, and advice providers (including financial advisors) are generally ineligible if their personal performance is the business's primary source of revenue," he added. "Presumably, this bill would not change this limitation."
Kustoff said that expanding the 199A deduction to 23% would give local business owners "the flexibility to hire more workers and invest in their operations."
The legislation, Kustoff and the bill's co-sponsors explained, would also update inflation rules by replacing the base year from 2018 to 2025.
More than 90% of U.S. businesses are structured as pass-through entities, the lawmakers said.
"Even a modest increase from 20% to 23% carries a real revenue cost, and without offsets, proposals like this add pressure to the deficit, which is becoming harder for lawmakers to ignore," Bush added. "Supporting entrepreneurs is broadly popular, but tax policy always comes down to trade-offs, and this proposal will likely face scrutiny over whether it's helping Main Street — or reinforcing the perception of a tax break that leans toward the top."
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