Impact of 199A Deduction

As 2025 approaches, members of Congress are seriously evaluating many of the 2017 tax reform provisions that are scheduled to expire after 2025. One provision gaining significant attention is the 20% Section 199A deduction for qualified business income of pass-through entities. Post-TCJA, a pass-through entity is entitled to deduct 20% of qualified business income (which generally excludes service business income, although service businesses with income that falls below the annual threshold levels also qualify for the deduction). When income exceeds the relevant threshold, the deduction is capped at the greater of (1) 50% of W-2 wage income or (2) the sum of 25% of the W-2 wages of the business, plus 2.5% of the unadjusted basis, immediately after acquisition, of all qualified property.

We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about the impact of the Section 199A deduction as it currently exists.

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

Their Votes:





Their Reasons:

Byrnes: This relatively new QBI deduction has essentially levelled the playing field between corporations and pass-through entities. When the corporate tax rate was slashed to 21%, business owners would have been making the choice between the potential 37% tax rate for pass-throughs and that much lower corporate tax rate. Making critical business decisions based solely on tax liability rarely results in the best outcome.

Bloink: The 20% QBI deduction has ended up offering yet another tax loophole for the wealthy. Yes, it's beneficial for small business owners who might otherwise have been forced into the corporate structure. It's also given wealthy corporations yet another option for reducing their federal income tax liability.

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Byrnes: Without the Section 199A deduction, small business owners would be making choices with respect to choice of entity that are entirely based on federal tax issues, rather than the benefits of the business structure itself and the needs of the business. That’s bad for small business owners, of course, but it also damages the economy as a whole. 199A was a necessary part of the puzzle with respect to tax reforms designed to boost business and strengthen the economy.

Bloink: The rules governing the Section 199A deduction are complicated and can easily be manipulated by high-net-worth taxpayers. While I'm not suggesting that we allow the 199A deduction to expire entirely, 199A was never intended to be a tax loophole for the wealthiest Americans to use as they please. Unfortunately, that’s how it’s often been used by wealthy Americans seeking to minimize their tax liability. Change is necessary.

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Byrnes: In the end, without Section 199A, many small business owners would probably have been forced to deal with the traditional corporate structure in order to be taxed fairly, which results in double taxation and isn't really necessary for smaller businesses with less complex operations. Section 199A is important because it essentially works to level the playing field, at least from a pure tax perspective, between traditional C corporations and pass-through entities. The law already contains built-in income thresholds designed to prevent abuse.

Bloink: We need to impose clear and airtight income limits so that the super-rich are not able to manipulate the rules to take advantage of 199A and avoid paying their fair share. As the rule stands, exceptions and qualifications currently exist to allow the wealthiest taxpayers to manipulate their situations to benefit from the deduction rather than paying their fair share.