Average Small Business Tax Burden Would Jump By Nearly Half Without Section 199A Deduction

When U.S. lawmakers the 119th Congress are seated on Jan. 3, 2025, they will almost immediately be confronted with what to do about several tax policies that expire Dec. 31, 2025. These provisions include a deduction created by the 2017 Tax Cuts and Jobs Act that is for pass-through organizations that pay federal taxes through the individual income tax rate system rather than the corporate one. Known as the Section 199A deduction, this policy allows eligible taxpayers to deduct up to 20 percent of their qualified business income (QBI), plus 20 percent of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income.

Income earned through a C corporation or by providing services as an employee is not eligible for the deduction. The deduction is available regardless of whether taxpayers itemize deductions on Schedule A or take the standard deduction.

According to the U.S. House of Representatives Committee on Ways and Means, failing to extend this policy would raise taxes on small businesses by an average of 43.4 percent, and force many U.S. businesses to pay much higher rates that U.S. corporations and firms operating in other countries, including competitors in China. The taxes would affect businesses in every state in the country. (Visit this link to see how your state would fare.)

According to the National Federation of Independent Business (NFIB), 48 percent of small business owners say uncertainty about Section 199A is affecting their current or future business plans. Interested MSCI members can use this link from NFIB to tell members of Congress to renew the Section 199A deduction in 2025.

The Internal Revenue Service has more about the Section 199A deduction at this link.