On July 20, 2021, Senate Finance Committee Chair Ron Wyden (D-OR) proposed legislation to modify the 20% deduction allowed to investors in certain pass-through businesses under Section 199A. The proposal would eliminate the limitations on the types of business income that are eligible for deduction, limit the deduction to individuals, and begin phasing out the deduction for individuals earning more than $400,000.
Section 199A, which was codified as part of the Tax Cuts and Jobs Act, allows noncorporate taxpayers to deduct up to 20% of their “qualified business income” from a domestic sole proprietorship, partnership, S corporation, trust, or estate, resulting in a maximum effective tax rate of 29.6% with respect to that income (instead of 37%). The deduction phases out for “specified service trade or business” (SSTB) income earned by taxpayers with aggregate income above a certain threshold, and is denied entirely for SSTB income earned by joint filers with aggregate income above $415,000 (or individual filers with aggregate income above $207,500). SSTB income includes income from health, law, accounting, performing arts, and consulting businesses, as well as investing, investment management, or trading or dealing in securities, partnership interests, or commodities.
The Wyden proposal would eliminate the SSTB income carveouts and provide that all trade or business income is eligible for the deduction, other than income earned from the trade or business of performing services as an employee.
To defray the cost of expanding the scope of trade or business income eligible for deduction, the Wyden proposal would eliminate the deduction for trusts, estates, and married individuals filing separate returns, and would begin phasing out the deduction for individuals with taxable income above $400,000. Wyden indicated that he intends for his proposal to be included in the $3.5 trillion budget reconciliation bill currently being drafted by congressional Democrats.
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