Biden's Qualified Business Income (QBI) Plan

Democratic presidential candidate Joe Biden’s tax plan includes a proposal that would modify the current deduction for qualified business income (QBI) available to pass-through entities. Under current law, business owners are permitted to deduct 20% of QBI if their earnings fall below certain threshold limits (in 2020, $163,300 for single filers and $326,600 for joint returns). Once income exceeds these limits, complex rules determine the amount of the business owner’s permitted deduction. Biden’s plan would phase the QBI deduction out entirely for higher income taxpayers, beginning at $400,000 annual income. For taxpayers below the $400,000 line, the deduction would remain as it currently stands.

We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about Biden’s plan to modify the Section 199A QBI deduction.

Below is a summary of the debate that ensued between the two professors.

Their Votes:

Bloink

Byrnes

Their Reasons:

Bloink: Biden’s plan is exactly what Section 199A needs to make the QBI deduction workable for small business owners. From the outset, Section 199A was a complex mess of rules and exceptions, all of which were subject to interpretation and most of which were difficult for the average business owner to decipher. This would provide a bright-line rule for higher income business owners.

Byrnes: This plan is a hidden tax hike on small business owners. Those who earn above the $400,000 annual threshold will lose the benefit of this valuable deduction and have a perverse incentive to switch to a corporate form, where they can take advantage of lower rates.

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Bloink: The current maze of complex phaseout rules begins to apply for business owners who earn as little as around $160,000 per year. Even the most experienced of tax professionals have had a difficult time interpreting the guidance we’ve received on how to calculate the QBI deduction phaseout. Many of these small business owners don’t have the resources needed to effectively plan for the deduction. In this time of uncertainty, giving small business owners peace of mind so that they can plan for their tax liability is more important than ever.

Byrnes: The complex rules involved in calculating business owners' QBI deduction were put into place for specific reasons. Business owners who have employees and pay wages should be encouraged to keep doing that. Similarly, those who invest in property and growing their business should be encouraged to do so. The phase out rules may be complex, but they're purposeful. Biden’s only purpose is raising revenue.

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Bloink: Revenue that this country sorely needs. We have to face facts. The dramatic aid packages that have been put into place this year were absolutely necessary—but they’re also extremely costly. We’re going to have to find ways to increase revenue streams to make up for some of that. Aren’t GOP leaders always complaining about the national debt? Biden’s plan is expected to raise something like $200 billion, most of which before the deduction is set to expire in 2026. The country needs this simplicity and the country frankly needs the revenue.

Byrnes: This hidden tax hike and blanket $400,000 threshold would punish many business owners for paying wages at a time when we need to encourage job growth the most. The current rules consider a number of factors, including qualified W wage payments, in determining a business owner’s QBI deduction. Those who pay wages generally qualify for a larger deduction. Why should more successful business owners suffer because they’re doing their part to facilitate job growth and help the economy?