Tax Facts
Senate Changes to 199A Deduction
The Senate has now released its version of Trump’s “big, beautiful bill” and, as expected, it does not neatly align with the House-passed version. Notably, the Senate provision on Section 199A differs from the House version, though both versions make the 199A deduction permanent. The House draft would raise the 20% qualified business income (QBI) deduction to 23% and make it easier for specified service trades and businesses (SSTBs) to qualify. Instead of phasing in the existing SSTB and wage and investment limitations over a fixed range of taxable income, the House would phase the limitations in at a fixed rate. For each dollar of taxable income over the threshold amount, a taxpayer’s deduction for QBI would be reduced by 75 cents until the SSTB and wage/investment limitations are fully phased in. The Senate version did not contain the increase or the 75-cent phaseout. Instead, it would increase the threshold phase-out ranges by increasing the $50,000 (non-joint returns) and $100,000 (joint returns) amounts to $75,000 and $150,000.
We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about the changes to the 199A deduction for QBI in the Senate draft tax legislation when compared to the House version.
Below is a summary of the debate that ensued between the two professors.
Their Votes:
Their Reasons:
Byrnes: By leaving the baseline deduction at 20%, rather than increasing it to 23%, we'll save hundreds of millions of dollars. We have to remember the cost of enhancing existing tax breaks that have already been proven beneficial to taxpayers. The Senate's version is just as beneficial as the House version, yet comes with a lower price tag—exactly the type of modifications we need to get this legislation signed into law and provide necessary tax certainty for all Americans.
Bloink: Increasing the 20% deduction to 23% as the House proposed would go a long way toward creating parity between the pass-through structure and the traditional C corporation structure, at least from a tax standpoint. The largest and most powerful corporations got the most significant--and permanent--tax cuts in the 2017 legislation. Now, it's time to focus on increasing the tax benefits for the hardworking small business owners who operate as pass-through entities.
_________________________________
Byrnes: Yes, enhancing the QBI deduction via an outright increase would provide an even more powerful tax benefit to pass-through business owners--but at what cost? The Senate bill makes the 199A deduction permanent and also increases the threshold amounts over which the deduction phases out to ease burdens for SSTBs and pass-through entities subject to the wage and investment limitations of 199A.
Bloink: The House version provides a critical expansion to offer the 199A deduction benefits for SSTBs--and the Senate version eliminated that key detail, so would continue a situation where SSTBs operating as pass-throughs are not entitled to the most significant tax breaks simply because of their chosen profession. This differential treatment has always been patently unfair, and the House version would more effectively deal with the current inequality.
_________________________________
Byrnes: The Senate version is superior in that it both avoids increasing the cost of the 199A deduction and goes further to protect the smallest business owners. The Senate version also creates a new, inflation-adjusted, minimum deduction of $400 for taxpayers who have at least $1,000 of QBI. This provision serves to provide benefits to those driven taxpayers who are just beginning their businesses or attempting to better themselves by starting up a side business. When we’re comparing the two versions, the Senate version clearly provides the strongest benefits.
Bloink: The House version, plain and simple, provides a stronger across-the-board deduction to all pass-through entities, regardless of chosen occupation. Yes, the Senate version strengthens the existing version of the QBI deduction—but the House bill simply goes further. When we’re evaluating costs, we should take this new opportunity to provide stronger benefits to the small business owners of this nation rather than digging in on the permanent tax cuts that were granted to the largest corporations back in 2017.
We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about the changes to the 199A deduction for QBI in the Senate draft tax legislation when compared to the House version.
Below is a summary of the debate that ensued between the two professors.
Their Votes:
Their Reasons:
Byrnes: By leaving the baseline deduction at 20%, rather than increasing it to 23%, we'll save hundreds of millions of dollars. We have to remember the cost of enhancing existing tax breaks that have already been proven beneficial to taxpayers. The Senate's version is just as beneficial as the House version, yet comes with a lower price tag—exactly the type of modifications we need to get this legislation signed into law and provide necessary tax certainty for all Americans.
Bloink: Increasing the 20% deduction to 23% as the House proposed would go a long way toward creating parity between the pass-through structure and the traditional C corporation structure, at least from a tax standpoint. The largest and most powerful corporations got the most significant--and permanent--tax cuts in the 2017 legislation. Now, it's time to focus on increasing the tax benefits for the hardworking small business owners who operate as pass-through entities.
_________________________________
Byrnes: Yes, enhancing the QBI deduction via an outright increase would provide an even more powerful tax benefit to pass-through business owners--but at what cost? The Senate bill makes the 199A deduction permanent and also increases the threshold amounts over which the deduction phases out to ease burdens for SSTBs and pass-through entities subject to the wage and investment limitations of 199A.
Bloink: The House version provides a critical expansion to offer the 199A deduction benefits for SSTBs--and the Senate version eliminated that key detail, so would continue a situation where SSTBs operating as pass-throughs are not entitled to the most significant tax breaks simply because of their chosen profession. This differential treatment has always been patently unfair, and the House version would more effectively deal with the current inequality.
_________________________________
Byrnes: The Senate version is superior in that it both avoids increasing the cost of the 199A deduction and goes further to protect the smallest business owners. The Senate version also creates a new, inflation-adjusted, minimum deduction of $400 for taxpayers who have at least $1,000 of QBI. This provision serves to provide benefits to those driven taxpayers who are just beginning their businesses or attempting to better themselves by starting up a side business. When we’re comparing the two versions, the Senate version clearly provides the strongest benefits.
Bloink: The House version, plain and simple, provides a stronger across-the-board deduction to all pass-through entities, regardless of chosen occupation. Yes, the Senate version strengthens the existing version of the QBI deduction—but the House bill simply goes further. When we’re evaluating costs, we should take this new opportunity to provide stronger benefits to the small business owners of this nation rather than digging in on the permanent tax cuts that were granted to the largest corporations back in 2017.
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