Qualified Business Income Deduction May Expire After 2025

Trillions of dollars worth of tax breaks are set to expire after 2025 without an extension from Congress, including large deductions for millions of self-employed filers and business owners.

The Tax Cuts and Jobs Act of 2017, enacted by former President Donald Trump, created a qualified business income deduction (QBI) worth up to 20% of eligible income, with limitations.

The temporary deduction applies to so-called pass-through businesses that report income at the individual level, such as sole proprietorships, partnerships and S corporations, as well as some trusts and estates.

Dan Ryan, a tax partner at law firm Sullivan & Worcester, said if the tax breaks were allowed to expire, “it would be very disruptive for a lot of business owners, so I hope they get extended.” Ta.

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Lawmakers added a temporary QBI deduction to the Tax Cuts and Jobs Act to create a tax rate for pass-through businesses similar to the tax rate for businesses.

However, while the QBI deduction would be eliminated after 2025, the bill would have permanently reduced corporate taxes by lowering the top federal tax rate from 35% to 21%.

The IRS said there were about 25.9 million QBI claims in tax year 2021, the most recent data available, up from 18.7 million in 2018, the first year the tax break was available.

“This is very important for many privately held companies,” said Howard Gleckman, a senior fellow at the Urban-Brookings Tax Policy Center.

Garrett Watson, senior policy analyst and modeling manager at the Tax Foundation, said there are “very strong feelings” about whether the QBI deduction should be extended as the 2025 tax cliff approaches.

Advocates for businesses argue that the deduction will boost growth and are pushing to make the tax cuts permanent. On the other hand, some policy experts and lawmakers point out the high cost and complexity of deductions.

The QBI deduction is “quite expensive,” Watson said, estimated to cost more than $700 billion over 10 years. That could become an issue in the debate over the federal budget deficit.

Other critics say the QBI deduction primarily benefits wealthy individuals because high-income earners are more likely to receive pass-through income. But millions of middle-income taxpayers are also claiming the credit, according to IRS data.

Watson said some Democrats want the tax cuts to expire, but “that goes against the president’s tax promises.”

In June, White House National Economic Advisor Lael Brainard reaffirmed President Joe Biden’s promise to extend Trump’s tax cuts only to people making less than $400,000 a year.