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Possible Extension of Section 199A Pass-Through Deductions

At a Glance

Main Takeaway

Understanding business taxes is critical to the success and growth of private companies. The Tax Cuts and Jobs Act (TCJA) of 2017, especially Section 199A, has financially benefited these businesses. Since 2018, it has provided valuable income deductions for pass-through entities, lowering their tax burden.

Next Step

Though these advantages are set to end after 2025, new developments this year hint at a possible extension. For private business owners, it is essential to consider the potential implications for future financial planning.


What is the Section 199A Deduction?

Section 199A is a tax deduction introduced in the TCJA, benefiting many private businesses, particularly those classified as “pass-through” entities like partnerships and S corporations. A sole proprietorship can be eligible for the 199A deduction as well.

The Section 199A deduction, often called the Qualified Business Income (QBI) deduction, was implemented to level the playing field between corporations and pass-through entities. The TCJA lowered the federal corporate income tax rate from 35% to 21%. This created a need for comparable tax relief for pass-through businesses to prevent a widening disparity, promote economic growth, incentivize investment, and support entrepreneurship.

For pass-through companies, income passes through to the owners and is taxed on the owners’ tax returns. With the Section 199A pass-through deduction, business owners can deduct up to 20% of their qualified business income, reducing their distributive share of taxable income from the pass-through entities.


Who Qualifies for Section 199A Deductions?

Section 199A deductions provide tax relief to smaller businesses and certain types of larger entities that do not pay corporate income taxes. Typically, these deductions apply to taxpayers such as:

  • Sole proprietorships: Individual business owners who report business income and expenses on Schedule C of their personal tax returns.
  • Partnerships, including Limited Liability Companies (LLCs): Businesses with two or more owners that are not structured as corporations.
  • S Corporations: Corporations with a valid S election and pass corporate income, losses, and credits through to shareholders.

Depending on specific circumstances, other businesses might also be eligible for the Section 199A deductions, such as Real Estate Investment Trusts (REITs) and Publicly Traded Partnerships (PTPs). These entities do not directly engage in business operations; they own assets that generate income, often from real estate or energy-related activities.


What is the Main Street Tax Certainty Act?

Pass-through deductions under Section 199A are set to end after December 31, 2025. If this happens, it could increase tax burdens for many private businesses, potentially restricting growth and financial flexibility.

In anticipation of these changes, Montana’s Senator Steve Daines introduced Senate Bill S.1706, the Main Street Tax Certainty Act, on May 18, 2023. The bill proposes removing the ending date for these tax incentives, effectively making Section 199A’s deductions available permanently.

Pennsylvania representative Lloyd Smucker also recently introduced a sister bill, H.R. 4721, into the House. It contains the same proposed change, aiming to make 199A deductions permanent.

As of August 2023, neither bill has been reviewed by Congress.


What the New Bill Could Mean for Your Business

According to the National Association of Insurance and Financial Advisors (NAIFA), tax rates for the owners of eligible pass-through entities would increase by up to 16% compared to publicly traded corporations if the 199A deductions are discontinued.

The passage of the Act would allow eligible private businesses to avoid a major tax hike in the coming years, supporting competition between smaller pass-through business entities and larger, publicly traded companies.

If you own an S corporation, a partnership, or a sole proprietorship, the passage of the Act has multiple potential advantages. It would allow you to continue claiming 199A pass-through deductions for 2026 and beyond, providing your organization with benefits such as:

  • Tax savings: Gives you continued access to valuable deductions, reducing tax liability and boosting your cash flow. With the help of a professional business accounting and tax planning firm, you can maximize your tax savings using the 199A deduction and other tax credits and incentives based on your company’s location and industry.
  • Financial planning: You can plan and strategize your financial future more effectively under stable tax regulations. With the permanent expectation of the 199A deduction, you can make long-term decisions about investments and expansions and allocate your resources efficiently.
  • Competitive edge: A tax advantage can level the playing field for smaller entities. The 199A deductions can result in significant savings, providing more working capital and helping combat inflation. You can channel this additional capital into enhancing product quality, diversifying offerings, or optimizing service delivery, making them more competitive and resilient, especially in inflationary environments.
  • Business growth: The potential tax savings from the 199A deductions can serve as a catalyst for expansion and innovation. Instead of diverting funds toward tax obligations, you can channel those resources back into operations, investing in groundbreaking research, fostering innovation, or hiring industry-leading talent.
  • Employee benefits and retention: With the continued 199A deduction, you can focus on developing well-rounded employee compensation and benefits packages. With the savings from the deduction, you can invest in your workforce, offering higher salaries, better benefits, or more comprehensive training programs, which can help attract top talent and retain existing employees, resulting in a more satisfied and motivated workforce and long-term business success.

Navigating the complexities of the 199A deduction can be challenging. At Windes, Our team of tax experts can help you remain compliant with evolving tax laws and optimize your business structure for maximum tax benefits. We can help you use the 199A deduction while minimizing risks and maximizing growth opportunities.


Ensure Effective Tax Planning with Windes

Impending tax changes can affect your business’s finances and competitiveness. Whether you own a sole proprietorship, an S corporation, or a partnership, the business tax experts at Windes can assist you.

We can help you understand the implications of new and upcoming taxation changes, such as the Inflation Reduction Act or the Main Street Tax Certainty Act. Our team can also help you build long-term business strategies around each possible outcome, ensuring you receive guidance tailored to your needs regardless of changes in tax legislation.

Connect with us today to learn more about our business tax services.


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