As Republicans negotiate a tax package…
They’ll have to consider business taxes. Business lobbying groups are pushing for an extension of the 20% qualified business income (QBI) deduction. They also want to bolster three business tax provisions that have been watered down over the last few years.
Let’s first turn to the 20% QBI write-off. Self-employed people, independent contractors, farmers, some landlords, and owners of pass-through entities… such as partnerships, LLCs, and S corporations… can claim the break on line 13 of their Form 1040.
This deduction ends after 2025, unless Congress acts. It was first enacted in the 2017 Tax Cuts and Jobs Act (TCJA) to provide some federal income tax parity between C corporations, which are taxed at a 21% rate, and pass-throughs, in which the individual owners pay income tax on earnings up to a 37% tax rate.
QBI is one’s allocable share of income less deductions from a business.
The rules can get complicated, especially for upper-income individuals… people with incomes greater than $394,600 for joint filers and $197,300 for others. Two special limitations apply. First, the break phases out for upper-incomers in specified service trades or businesses. Second, there is a W-2 wages-paid limitation.
Congressional GOPers want to make the 20% QBI deduction permanent. And they have support from lobbying groups representing Main Street businesses.
Some tax professional groups want the write-off expanded. For example, the American Institute of CPAs wants the specified service trade or business limit for upper-incomers removed, or alternately, an increase to the monetary threshold.
Extending the deduction would cost the government a boatload of money. This popular tax break is in the top 10 largest individual income tax expenditures rounded up by the staff of the bipartisan congressional Joint Com. on Taxation.
Lawmakers also want to fully restore three popular business tax breaks:
Bonus depreciation. Prior to 2023, businesses could deduct the full cost of new and used qualifying assets with lives of 20 years or less. Now, the break is 40%, and next year it falls to 20%. Businesses want 100% bonus depreciation revived.
R&D. Before 2022, firms could fully expense research and development costs in the year incurred. The TCJA changed this for tax years that started after 2021. Businesses are required to amortize their R&D expenses over five years…15 years for overseas research. House and Senate GOPers want the old rules resuscitated.
Interest deductions on business debts of large companies. The TCJA limited many big firms’ net interest write-offs to 30% of adjusted taxable income (ATI), with disallowed interest carried forward. Starting with tax years that began in 2022, depletion and amortization write-offs are accounted for in computing a firm’s ATI. Eliminating these two deductions from the ATI calculation would increase ATI, thus letting firms deduct more interest than if the two deductions were included.
IN CONGRESS
While congressional GOPers debate the best way forward for a big tax plan…
There is some bipartisan consensus on smaller, procedural tax items. Our last Letter highlighted a discussion draft of proposed changes to IRS procedure and administration from the chairman and ranking member of the Senate Finance Com. And earlier this month, four bills to improve tax administration that were supported by IRS’s National Taxpayer Advocate sailed through the House Ways & Means Com. One would help taxpayers whose paper refund checks were stolen, by allowing them to request a replacement refund in the form of a direct deposit. A second proposal would let the National Taxpayer Advocate office hire its own lawyers. The third bill would add clarifying language on IRS’s math error notices. Under the fourth proposal, electronic payments or documents submitted to IRS by midnight on the due date would be timely even if IRS doesn’t receive or process the submissions on that day.