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.
As Democrats begin to assemble their large tax proposal this fall, NAHB anticipates changes to 199A will be among those that are considered. In June, NAHB joined more than 100 business groups in a letter to Congress opposing any reduction or repeal of this deduction. We will continue to engage with Congress as lawmakers assemble their tax plan.
Sen. Wyden's office has said the bill would generate $147 billion over 10 years. Section 199A is scheduled to expire after 2025.