Senate Finance Committee Chairman Ron Wyden has drafted legislation that would remake a signature part of the 2017 tax overhaul, shaking up a tax break that Republicans bill as a boon to small enterprises and Democrats criticize as benefiting wealthy business owners.
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Called the Small Business Tax Fairness Act, the bill would make certain currently disallowed professions eligible for the lucrative tax break, though it would also cap eligibility by income. Under his proposal for new caps, taxpayers earning $400,000 or less in so-called qualified business income that’s eligible for the benefit would not see any change. The deduction would gradually phase out for business owners making more than $400,000 and end altogether once income hits $500,000.
Under current law, the deduction phases out for professionals such as accountants, attorneys, doctors, athletes, consultants and entertainers whose incomes exceed $157,500 (for single taxpayers) or $315,000 (for married couples filing jointly). Other types of businesses can claim far larger deductions.
The tax break is for businesses run as pass-through entities, such as sole proprietorships, S corporations or limited liability companies, in which income passes directly to the owner or owners, who then pay tax at ordinary rates.
As head of the Senate Finance Committee, which oversees tax policy for the Senate, Wyden, an Oregon Democrat, wields significant influence in discussions around the congressional Democratic economic agenda. His bill could help provide more revenue for Democratic priorities ranging from more generous tax credits to building projects.
“Few policies showcase Republicans’ commitment to giveaways to the top 1% like the pass-through deduction created in their 2017 bill,” Wyden said in a statement. “The mega-millionaires get to write off 20% of their income while middle-class accountants are cut out. This makes no sense, and my bill would overhaul the deduction to ensure its (sic) benefiting Main Street small businesses.”
Though an official Congressional Budget Office report on the bill has not yet been made public, Wyden expects the new cap to raise tens of billions of dollars for the federal government over the standard 10-year budget window.
The deduction is broadly seen as a small-business deduction, but owners of wide income ranges of closely-held businesses can claim it, a fact that Democrats have criticized.
In 2018, the nonpartisan Joint Committee on Taxation estimated that by 2024, slightly more than half of the total dollar benefit of the deduction would go to taxpayers making more than $1 million annually. Still, most business owners claiming the benefit make less than $200,000, the JCT found.
The Biden administration has expressed openness to altering the deduction in order to offset the costs of its infrastructure and social spending plans. Speaking at a conference in June, Kimberly Clausing, the Treasury Department’s deputy assistant secretary of tax analysis, said she “wouldn’t read much into the absence” of changes to the current deduction in the administration’s policy proposals so far.
