The Tax Cuts and Jobs Act (TCJA) of 2017 enacted a permanent decrease in the corporate tax rate in addition to numerous temporary benefits to pass-through entities and individual taxpayers, including the qualified business income (QBI) deduction.
With only nine months until most temporary TCJA provisions expire, it’s critical for owners of pass-through entities to understand the impact of the QBI deduction expiration. While there has been talk of extending the deduction, it remains unclear whether Congress will take action.
The QBI deduction reduces the tax liability for qualifying pass-through businesses, including partnerships, S corporations, limited liability companies, sole proprietorships, and some trusts and estates.
The QBI deduction, sometimes referred to as the section 199A deduction, allows owners of passthrough entities to deduct up to 20% of qualifying business income. This reduces the effective rate pass-through owners pay on eligible income, aligning it more closely with the corporate tax rate. At the time of the TCJA’s passage, policymakers touted the corporate change as a benefit for “wall street” and the QBI deduction as a benefit for “main street.”
Impact of Potential Expiration
Absent of congressional action, not only will the QBI deduction expire, but the top individual tax rate will increase from 37% to 39.6%. Should these provisions expire, eligible business income would increase from a top rate of 29.6% to 39.6%.
|
Top Marginal Federal Tax Rate on Pass-through Business Income |
|
|
Current rates, QBI eligible |
29.6% |
|
Current rates, not QBI eligible |
37% |
|
Rates after TCJA Sunset |
39.6% |
If the QBI deduction is allowed to expire, affected businesses will see a substantial increase in their tax liabilities — an additional $10 for every $100 of business income, which represents a 34% increase. This additional tax obligation may leave businesses cash-strapped and unable to maintain their current pace of investment, leading to reductions in employment or capital expenditures. Some businesses, when evaluating their tax classification, may find a different entity structure will lead to a better tax outcome.
The Legislative Landscape
Republicans swept the 2024 elections, maintaining control of the House of Representatives and recapturing the Senate and the White House. The party is generally aligned in their desire to extend the expiring TCJA provisions; however, it’s important to note that the Republicans are a diverse conference, and members sometimes differ on policy. In addition, the House is working with an extremely thin margin, 220 – 215 after the election and 218 – 214 at the moment.
Despite controlling Washington, Republicans face some headwinds in crafting a tax bill that nearly all of their members will support. The most significant issue is the cost associated with tax reform. In 2024, the Congressional Budget Office estimated the cost of extending the TCJA for 10 years to be $4.6 trillion.
President Trump also has a lengthy list of tax priorities he’d like included in the bill, including eliminating tax on tips, overtime and social security, increasing the SALT cap and reducing the corporate tax rate to 15% for domestic manufacturers.
Republican fiscal hawks are concerned with the United States’ ballooning national debt and are demanding steep cuts in government spending to help offset the cost of potential tax reform.
Despite having a fine needle to thread, Republican leadership seems optimistic about their ability to pass a comprehensive tax reform bill in 2025.
What Affected Taxpayers Can Do
Taxpayers who would be impacted by the expiration of the QBI deduction should:
- Engage with policymakers and industry groups to advocate for extension.
- Model the consequences of both a continuation and potential expiration (may involve choice of entity analysis).
- Stay informed with Cherry Bekaert insights.
Understanding the factors affecting tax policy will help you navigate uncertainty and prepare for potential changes.
Your Guide Forward
If you have questions or need guidance on tax-related matters, we encourage you to reach out to your Cherry Bekaert tax advisor. Our team of experts is here to provide you with the insights and support you need to navigate complex tax issues confidently. Whether you're seeking advice on tax planning, compliance or any other concerns, we are committed to offering personalized solutions tailored to your specific needs.
