Congressional Democrats are considering reforms to the 20% tax deduction as part of a $ 3.5 trillion federal spending program.
The Democrats’ proposal would phase out tax relief for business owners with taxable income over $ 400,000, according to a discussion list obtained by CNBC. It would also make the tax cut available to more people below the $ 400,000 threshold by removing some existing restrictions.
A discussion list is a draft of ideas that lawmakers put together before formally presenting them to the House or Senate. Democrats are evaluating changes to the tax code to help raise funds of up to $ 3.5 trillion in spending on climate, education, paid vacation and other measures.
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According to the list, the pass-through allowance reforms would increase “significant revenues while providing a further tax cut for small business owners on Main Street.”
The deduction, also known as 199A, was created by the Republicans’ tax law of 2017, the iconic legislative achievement of President Donald Trump. It allows owners of intermediate businesses, such as sole proprietors, partnerships and S corporations, to amortize 20% of their business income.
Most of its benefits go to wealthy taxpayers.
In 2018, about 53% of its $ 40 billion worth went to those with incomes over $ 500,000, according to the Joint Committee on Taxation, a non-partisan body that reports to the US Congress. By 2024, that share is expected to reach 61% of a total of $ 60 billion.
While the Democrats’ discussion list is short on details, the transmission policy changes it proposes resemble concepts that Senate Finance Committee Chairman Ron Wyden, D-Ore., Included in a recent bill.
Wyden’s legislation would phase out the 20% deduction for business owners with taxable income over $ 400,000, completely eliminating the tax break once income exceeds $ 500,000.
The Wyden-sponsored bill would also expand eligibility for the tax break.
Currently, owners of some service businesses – such as lawyers, doctors, veterinarians, and financial advisers – cannot get the full deduction if their income is more than $ 164,900 (single filers) or $ 329,800 (married couples filing jointly) in 2021. They cannot get it at all if their income is over $ 214,900 (single) or $ 429,800 (married).
The pass-through deduction is expected to disappear after 2025, which means that any reform would end after a few years without an extension. President Joe Biden has not proposed any changes to the tax break in his annual budget.
Some business groups have argued that limiting or repealing the deduction will hurt small businesses and lead to fewer jobs, lower wages, and lower economic growth.
“Such changes would amount to an increase in direct taxes on US Main Street employers, a major reason why the tax plan released by the White House in March left the deduction fully intact,” according to a joint letter released in March. June by a trade coalition. associations.