Bill Intro’d on Small Biz Deduction

April 24, 2019

NSBA joined with more than 100 business groups in support of new legislation to make permanent the 20-percent pass-through deduction. Introduced by Senator Steve Daines (R-Mont.), the Main Street Certainty Act of 2019 (S. 1149)—is the companion bill to H.R. 216, bipartisan legislation introduced in the House by Reps. Jason Smith (R-Mo.) and Henry Cuellar (D-Texas). While the Section 199A deduction is popular for pass-through businesses – companies such as partnerships, S corporations, and sole proprietorships, it expires at the end of five years.

The new, 20-percent deduction was a key part of the Tax Cuts and Jobs Act (TCJA) enacted back in 2017. The deduction was designed to balance out the tax treatment of pass-through businesses with the lower, 21-percent tax rate paid by C corporations. The goal of the deduction is to work to level the playing field, but only for those business that get the full deduction.

This deduction is important because more than 90 percent of small businesses are organized as pass-throughs (S corporations, LLCs, sole proprietorships, or partnerships), not as corporations. Pass-through business owners – regardless of the type of business they own – can now claim a full 20 percent deduction on their share of the business’s income up to $315,000 in 2018 for those filing jointly. For small-business owners whose taxable income exceeds the threshold, the deduction is subject to formulaic limitations.

The challenge is that the deduction is scheduled to expire in 2026, at which time taxes on pass-through businesses would go up. This tax hike is due to the fact that while most of the individual provisions in tax reform, including the Section 199A deduction, expire beginning 2026, many of the revenue raising provisions applied to the business community remain in place, including the new cap on interest deductibility and the repeal of the old manufacturing deduction. The Daines-Smith-Cuellar bill would prevent this tax increases for business owners.

The letter, led by our Parity for Main Street Employers coalition, makes the case for permanence and was signed by one hundred and three national trade associations. The letter states: 

Despite the economic importance of the pass-through sector, the Section 199A deduction is scheduled to sunset at the end of 2025. Repealing this sunset will benefit millions of pass-through businesses, leading to higher economic growth and more employment. Economists Robert Barro and Jason Furman found that making the pass-through deduction permanent would result in a significant increase in economic growth. The American Action Forum found similar results.

You can read the entire letter here.

When NSBA endorsed the Tax Cuts and Jobs Act of 2017, our letter stated that “we view this tax reform plan not as an end-point but as an initial step to address a range of issues that Congress and the Administration must continue to pursue in 2018 and beyond—issues that were addressed inadequately or not at all in this bill. Specifically, Congress should focus on fixing the national debt, simplifying the tax code for small businesses, creating stability and predictability in our tax laws, and moving toward greater parity in the tax treatment of various business forms.”