Breaking Down the Small Business Pass-Through Deduction: Who Benefits and How?

Date: September 20, 2018

The Small Business Pass-Through Deduction of section 199A is one of the biggest triumphs following the 2017 passage of the Tax Cuts and Jobs Act.

According to Kenneth J. Kies, managing director of the Federal Policy Group, the Small Business PassThrough Deduction is “incredibly simple.” But before running the math, it’s important to understand who the deduction impacts and how.

Section 199A allows business owners up to a 20 percent deduction of qualified business income earned. Owners of businesses organized as s-corporations, sole-proprietorships, partnerships, or LLCs with up to $315,000 in net income for joint filers are eligible for the full 20-percent deduction without limitations or exclusions.

In his letter to the editor of Tax Notes, titled “Section 199A Passthrough Deduction: Challenging the Complexity Narrative,” Kies breaks down the deduction process into “two elementary steps: take the net income earned by the owner from the business; and multiply this net income by 20 percent (or 0.2).” And in the words of Kies, “it’s that simple.”  

This complexity narrative has been advanced on many fronts, including the mainstream media, the tax press, advocacy groups, ostensibly neutral experts, witnesses before congressional hearings, members of Congress, and even members of the tax-writing committees who I know and respect (and who I can only surmise must be tragically misinformed by their staffs),” Kies said. “For small businesses, the passthrough deduction of section 199A is both incredibly simple and also universally available.”

Even above the thresholds, many businesses will qualify for the deduction. Consider this eye-popping stat from Kies, based on current IRS tax return data: Of the 23.5 million small businesses in the U.S., 23 million have net business income of $250,000 or less. “In other words,” Kies writes, “97.3 percent of all U.S. businesses have net income of $250,000 or less.”

NFIB’s Small Business Introduction to the Tax Cuts and Jobs Act study reports that 84 percent of small business owners believe deduction to be “very” or “somewhat important.” The deduction expires after 2025 but the House of Representatives will consider legislation to make the deduction permanent next week

“The Small Business PassThrough Deduction, created in last year’s Tax Cuts and Jobs Act, has encouraged an unprecedented small business economic boom,” NFIB President and CEO Juanita Duggan said. “We are thrilled H.R. 6760 would make this important deduction permanent. Small business owners across the country need the tax cut to be permanent so that they have certainty as they evaluate plans to hire, increase wages, and grow their businesses.”

Proposed regulations on the deduction were issued on August 16th. Comments are due October 1, and final regulations are expected before the end of the year.

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