Tax Cuts and Jobs Act

Business Income Deduction's Present and Future


Tax planning with respect to non-business income may impact the best course for tax purposes by reducing or eliminating the “if less” rule. This is only an income tax deduction and it doesn’t reduce the base for computing the self-employment tax.

Aug 19th 2021
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Our focus for this article is on the Section 199A deduction that arose with the 2017 Tax Cuts and Jobs Act and the potential impact new legislation may have. Maximizing this deduction is a significant tax planning consideration through 2025.

The deduction is “above the line,” and so available to taxpayers even if they use the standard deduction, which is much more common these days. It can reduce the tax on business income, whether that income arises via sole proprietorship, partnership, S corporations, or an estate or trust.  

Estates and trusts may be less likely generally to have qualifying income, but when the deduction does apply, it may apply at the entity or beneficiary level. When the business is that of a partnership or S corporation, the deduction is calculated after flow-through rather than at the entity level.  

In the recent literature on our topic, the 20 percent of business income deduction is sometimes termed the “pass-through deduction,” apparently because the deduction most often benefits flow-through entity owners. Under current law, there can be type-of-business limitations (e.g., doctors, lawyers, accountants, ballerinas, quarterbacks, those in financial services, others) plus wage/qualifying property limitations.  

There may be more liberal rules at lower income levels as to these groups, which can suggest planning with respect to even charitable donations. Can charitable planning be impacted by the 20 percent of business income deduction?  Yes, yet more deductions can also bring into play the “lesser of” rule with its focus on taxable income. The complexities of the planning often emphasize “what if” math.

It is possible that rental real estate income will qualify in certain circumstances. Whether earned income constitutes wages or fees as a contractor is important for reasons such as payroll tax and withholding.

The distinction is important here also because wages do not qualify (See generally “Tax Cuts and Jobs Act, Provision 11011 Section 199A – Qualified Business Income Deduction FAQs,”, Tax Cuts and Jobs Act, Provision 11011 Section 199A - Qualified Business Income Deduction FAQs | Internal Revenue Service ( Re-qualifying rental real estate income for this deduction, see Q&A 21). 

The decision to incorporate and operate as a C corporation forgoes the 20 percent of business income deduction as to income in the entity. This is a major factor to consider in deciding whether to corporate (See “Incorporating Your Business – A Planning Opportunity and a Puzzle,” Rojas and Pusey, Practical Tax Strategies, May, 2020; duplicated at, “Articles”.  Of course, most business owners can incorporate and qualify to elect the S corporation route).

Our main focus, important to our year-end tax planning, is what the Biden administration might do in terms of this important provision. Senator Wyden of Oregon chairs the Senate Finance Committee. His government web site calls the 2017 Tax Cuts and Jobs Act a “partisan tax scam.” 

He goes on to say, “This new tax law is raising taxes on millions of middle-class families and showering hundreds of billions in benefits on multinational corporations that ship jobs overseas.” (Senator Wyden’s comments at  So, where does the 20 percent of business income deduction fall in terms of this influential senator and others given its origin in the 2017 Tax Cuts and Jobs Act?

The Senator introduced the “Small Business Tax Fairness Act” in July, 2021, the current text of which says it would apply to taxable years beginning after the date of enactment. The proposed bill would not tamper with the current expiration of the Section 199A deduction. The bill has its liberalizing features and can help some.  

The bill looks to expand the definition of qualifying trade or business to basically any other than wages as an employee. The Senate Finance Committee “Newsroom” write-up in this regard claims half the benefits go to millionaires, whereas many “Main Street small business owners are excluded.” It goes on to lament benefitting mega-millionaires “while middle-class accountants are cut out.” (Being one, the author couldn’t resist the quote). 

The “Newsroom” also states: “Small business owners would no longer have to calculate their deduction using formulas and limitations based on W-2 wages paid and qualified investments.” The bill would also purportedly exclude hedge fund managers and “real estate speculators like former President Trump.” (See “Wyden Introduces Small Business Tax Fairness Act to End Republican Giveaways to Top 1 Percent,” United States Senate Committee on Finance, “Newsroom,” 7/20/21;

“Wyden’s bill would aim to simplify the baseline deduction by using an individual’s taxable income as the basis, and allow a 20 percent deduction of their income from that business.  The current pass-through benefit involves a more complicated calculation comparing 20 percent of the business income against 20 percent of the owner’s taxable ordinary income, excluding long-term capital gain.” (“Wyden to Push for Changes to Trump-Era Business Deduction,” Colin Wilhelm,,

Its main delimiting feature focuses on the “threshold amount” defined as $400,000. To this author’s reading, the key is the rule that would look to the taxpayer’s taxable income over $400,000, and basically phase out the deduction gradually as taxable income reaches 500,000.  

There would appear to be complete elimination of the deduction at the $500,000 taxable income level. (The Senate Finance Committee “Newsroom,” describes the deduction as phasing out as individuals earn more than $400,000). The amount of qualifying business income would appear to be limited to the much publicized $400,000 threshold.  

Other aspects of the bill deny the deduction to marrieds filing separately, as well as trusts and estates.  The original Section 199A helped a “taxpayer other than a corporation” whereas this bill would limit the deduction to an individual (Text of the proposed bill can be found at: percent20Small percent20Business percent20Tax percent20Fairness percent20Act.pdf).

There are also proponents arguing for complete repeal of the Section 199A deduction (“Repealing Flawed `Pass-Through’ Deduction Should Be Part of Recovery Legislation,” Samantha Jacoby, Center on Budget and Policy Priorities,” 6/1/21, President Biden’s proposals per se do not appear to repeal or even cut back the 20 percent of business income deduction (“Briefing Room, Fact Sheet: The American Families Plan, The White House, 4/28/21;   

In Closing

So, we do have prospects of no change to Section 199A, some proponents for repeal, and Senator Wyden’s new proposal expanding the benefits for some while not allowing the deduction to benefit high income taxpayers. Tax planners will be watching for prospects of legislative change because of the provision’s significance to the broad spectrum of taxpayers.

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