Bill Introduced to Streamline Process, and Expand Pass
Through Entities Eligibility for Section 199A Deduction for Qualified Business Income

Legislation has been introduced to streamline the section 199A deduction for qualified business income (QBI) for pass-through entities, allowing accountants, lawyers, doctors, and others to qualify, but phasing out above $400,000.

The Small Business Tax Fairness Act would overhaul the 199A QBI deduction that was included in the Tax Cuts and Jobs Act of 2017, which provided a 20% deduction to pass-through businesses. However, the 2017 tax law phased out the deduction for professionals such as accountants, attorneys, doctors, athletes, consultants, and entertainers whose incomes exceeded thresholds of $157,500 for single taxpayers or $315,000 for married couples filing jointly. Other types of businesses could claim far larger deductions. The legislation would impose a cap of $400,000 to limit how much wealthy business owners could deduct from their taxes.

The bill would expand eligibility for middle-income services business owners by removing the arbitrary restrictions in the 2017 tax law on which industries qualify for the 199A deduction and which don’t. The current limitations on the QBI deduction cause confusion for taxpayers trying to determine if they are a “specified service trade or business”. The bill aims to make it easier to make that determination.

The bill would also simplify the calculations of businesses to determine their deduction. It would establish one threshold of $400,000 for determining whether the taxpayer gets the deduction and a single definition of qualified business income that applies to all taxpayers. Small business owners would no longer need to calculate their QBI deduction using formulas and limitations based on W-2 wages paid and qualified investments.

To cover the cost of expanding the pass-through deduction to small businesses and help finance other priorities like childcare and education, the bill would phase out the deduction for individuals who earn more than $400,000.

This legislature helps small businesses in two very specific ways: It provides direct tax relief through expanded eligibility on the pass-through deduction, and it simplifies the process for calculating that deduction.

The information presented here should not be construed as legal, tax, accounting, or valuation advice. No one should act on such information without appropriate professional advice and after a thorough examination of the particular situation.