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IRC Section 199A – Qualified Business Deduction

Jun 16, 2021

The nail is not in the coffin – not yet!

During the campaign, then-candidate Joseph Biden campaigned on raising income taxes; corporate income tax rate from 21% to 28% and higher tax rates and elimination of certain provisions for noncorporate taxpayers with incomes over $400,000.  Included in these tax proposals was the phase-out of the IRC Sec. 199A qualified business deduction (“QBI”) for taxpayers with income over $400.000.  This actually makes some sense since the lower corporate rate and the QBI deduction go hand-in-hand. 

IRC Sec. 199A was a new provision enacted by former President Trump in the 2017 Tax Cuts and Jobs Act (“TCJA”), essentially to create parity with the lowering of the corporate income tax rate from 35% to 21%.  IRC Sec. 199A allowed a noncorporate taxpayer a 20% deduction on qualified income.  Therefore, a noncorporate taxpayer in the 37% tax bracket would pay an effective income tax rate of 29.6% (37% X 80%) on qualified income.  Qualified income is generally defined as U.S.-sourced income generated by a pass-through entity by certain businesses.  Note: IRC Sec. 199A is scheduled to sunset in 2025 under the TCJA unless made permanent.

President Biden recently released his administration’s FY2022 budget request, which formalizes their legislative agenda for the upcoming fiscal year. Additionally, the Treasury department released its related Green Book, which describes the President’s proposed budget changes and revenue estimates in more detail. 

What is missing from the Green Book? The elimination of the QBI deduction for noncorporate taxpayers over the $400,000 threshold.

What is also missing from the Green Book?  Making the QBI deduction permanent.  As stated earlier, the QBI deduction is slated to sunset in 2025!

It is a hopeful sign that the QBI deduction might not be eliminated as it has provided significant relief to many noncorporate taxpayers.  However, if the corporate rate goes up, will there be a need for the QBI deduction which was enacted to create parity with the lower corporate rate and higher individual rates?  With negotiations still in the early stages, it remains to be seen what the future holds for the QBI deduction!

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Allyson J. Milbrod

Allyson Milbrod is a Tax Partner and a leader of the firm’s National S Corporation tax services team, with over 20 years of experience in public accounting, review of corporate, individual and partnership tax returns, tax planning for businesses and individuals, multistate taxation issues and federal and state audits.

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