Senate Finance Committee Chairman Ron Wyden recently introduced a bill that would make several changes to section 199A of the tax code, which provides many owners of sole proprietorships, partnerships, S corporations, and some trusts and estates a deduction of income from a qualified trade or business.
The 20% pass-through deduction — also known as the qualified business income deduction — was implemented by the Tax Reform and Jobs Act in late 2017 to provide qualifying "pass-through" business owners a tax deduction equal to 20% of qualifying business income (subject to limitations).
NAHB supported the creation of this deduction as a means to provide parity between the lower corporate tax rate and the higher individual rates pass-through businesses face. Sen. Wyden's bill includes the following key changes:
- Elimination of trusts and estates as qualifying businesses. Under current law, trusts and estates that function as a business may be eligible for the 199A deduction so long as income is "qualified business income" (QBI). The Wyden bill would narrow eligibility so that it excludes trusts and estates.
- Deduction fully phased out once taxable income reaches $500,000. The QBI deduction currently has an income threshold of roughly $320,000, above which the deduction begins to phase out over the next $100,000. However, current law includes another eligibility criterion based on W-2 wages paid to employees and the business's basis in owned property. The bill eliminates the W-2 wages/basis test and changes the current income threshold to $400,000. A taxpayer's QBI deduction would fall to zero once their income reaches $500,000.
- Married individuals must file separately. If a married taxpayer or their spouse is taking the 199A deduction for a given tax year, the couple loses the "married filing jointly" option. Rather, each taxpayer must file taxes separately.