Wyden introduces bill to overhaul pass-through deduction and expand to accountants

Cecilia Nysing

Senate Finance Committee chairman Ron Wyden, D-Oregon, introduced legislation Tuesday to streamline the section 199A deduction for qualified business income for pass-through entities, allowing accountants, lawyers, doctors and others to qualify, but phasing out above $400,000.

The Small Business Tax Fairness Act would overhaul the 199A QBI deduction that was included in the Tax Cuts and Jobs Act of 2017, which provided a 20% deduction to pass-through businesses. However, the 2017 tax law phased out the deduction for professionals such as accountants, attorneys, doctors, athletes, consultants and entertainers whose incomes exceeded thresholds of $157,500 for single taxpayers or $315,000 for married couples filing jointly. Other types of businesses could claim far larger deductions. Wyden’s legislation would impose a cap of $400,000 to limit how much wealthy business owners could deduct from their taxes.

Proponents pointed out that 61% of the monetary benefit of the pass-through deduction goes to the top 1% of households, including businesses like real estate investors, who were specifically included in the Trump administration’s tax law. Wyden’s bill would expand eligibility for middle-income services business owners by removing the arbitrary restrictions in the 2017 tax law on which industries qualify for the 199A deduction and which don’t. The current limitations on the QBI deduction cause confusion for taxpayers trying to determine if they are a “specified service trade or business” without the advice of accountants and lawyers. Wyden’s bill aims to make it easier to make that determination.

Senator Ron Wyden, a Democrat from Oregon

Chris Goodney/Bloomberg

The bill would also simplify the calculations of Main Street businesses to determine their deduction. It would establish one threshold of $400,000 for determining whether the taxpayer gets the deduction and a single definition of qualified business income that applies to all taxpayers. Small business owners would no longer need to calculate their QBI deduction using formulas and limitations based on W-2 wages paid and qualified investments.

There is a trade-off, though, which would result in higher taxes for many business owners, including accountants who earn over $400,000. To cover the cost of expanding the pass-through deduction to Main Street small businesses and help finance other priorities like childcare and education, Wyden’s bill would phase out the deduction for individuals who earn more than $400,000.

“The American people are strongly supportive of the proposition that everybody pay their fair share in taxes, and that means the very wealthy and mega corporations,” Wyden said during a press conference Tuesday. “In effect, recognizing that they are losing this message about tax fairness, we have Republicans and their allies basically trying to rebrand every multimillionaire as a small business. They did that in this case, billing the pass-through deduction as a break for small businesses when more than half of the benefit goes to the very wealthy. Let’s be clear. Democrats aren’t raising taxes on Main Street and small businesses. We’re also going to make sure that Republicans and their special interests can’t classify every millionaire as a small business.”

Accounting Today asked Wyden if he had an estimate of how many accountants might benefit from his legislation. “My guess is your publication is going to come up with a number pretty quickly, but that was why I’m pleased to have a representative from a small accounting firm on the line,” he responded. “The fact is … there is widespread agreement across the political spectrum that what was done in 2017 was not a very sensible approach other than these advocates for the very wealthy who basically said, ‘We’re happy now that the United States Congress has gone through all of these contortions to create this byzantine and arbitrary system just so we could shovel money out to the wealthiest and pretend they’re a small business.’ We’re going to clean that up. We’re going to help the real small business.”

He referred to figures from Congress’s Joint Committee on Taxation for details. According to their estimates, the pass-through deduction for those making more than $500,000 per year will cost $36.9 billion in 2024. The Wyden proposal would eliminate the deduction for those making more than $500,000 per year for four years, translating to about $147 billion. The expansion to middle-income services businesses would cost money, but Wyden’s office expects that cost to be relatively small.

Anne Zimmerman, founder of Zimmerman and Co. CPAs, who co-chairs the advocacy group Small Business for America’s Future, said she has seen firsthand how the tax system hurts small business owners. “I’ve spent my life working with small businesses and have started, managed and sold a number of my own businesses over my career, employing anywhere from six to 20 employees at a time over the years,” she said. “As a CPA, I provide accounting services to small businesses and help them navigate the hurdles of the tax laws. The COVID-19 pandemic has had a disproportionate impact on small business owners who are struggling to recover.”

She expressed support for the Biden administration’s American Rescue Plan and contended it would help small businesses get back on their feet, citing a survey from her group, Small Business for America’s Future, indicating that 72% of the small business owners polled believe that infrastructure investment that the American Jobs Plan creates will help small businesses.

“This proposal from Senator Wyden will help raise the funds needed to deliver the infrastructure investments that we need, but it’s also an essential step to building a fair, equitable tax system for small businesses,” Zimmerman added. “In our survey, 75% of small business owners said that they believe that large corporations do not pay their fair share of taxes, and 76% said small businesses are harmed when large corporations take advantage of loopholes. Senator Wyden’s bill addresses these inequities. The Small Business Tax Fairness Act helps Main Street in two very specific ways: It provides direct tax relief through expanded eligibility on the pass-through deduction, and it simplifies the process for calculating that deduction.”

“By expanding eligibility for the pass-through deduction, this legislation would provide needed financial relief to thousands of small business owners who had previously been excluded from this benefit,” Zimmerman continued. “By closing the loopholes for the wealthiest companies and simplifying the process, it also levels the playing field for small businesses to compete in the marketplace. As an accountant and small business owner myself, I understand how difficult our tax system is to navigate for small businesses and why this kind of legislation is needed. Main Street wants a tax system that will work for them, not just for large corporations. This bill helps make that possible and will realign resources to be reinvested back into our communities.”

Tax professionals will be watching the legislation closely. “We have a lot of middle-market companies and partnerships that are relying on the deduction,” said James Alex, a principal at the accounting firm RSM US who formerly worked in the Treasury Department as a senior advisor to the Assistant Secretary for Tax Policy during the Trump administration. “Without question, it will affect many of our clients. You have to see the specifics, but it will definitely be of interest to a lot of our clients.”

The National Federation of Independent Businesses, an influential business group, expressed its opposition to the bill. “Senator Ron Wyden’s proposal to limit the Small Business Deduction and raise taxes on small businesses is the wrong plan at the wrong time,” said NFIB vice president of federal government relations Kevin Kuhlman. “Curtailing the Small Business Deduction would directly hurt small businesses’ ability to hire, invest in their businesses, and increase employees’ compensation, and threatens the fragile economic recovery. Over 90% of small business owners support making the deduction permanent. NFIB opposes limiting the Small Business Deduction and hiking taxes on small businesses. This new plan is also a divergence of President Biden’s tax proposals, which do not include any cuts to the Small Business Deduction, because now is not the time to raise taxes on small businesses. The administration and Congress should focus on solutions to help small business owners recover from the pandemic.”

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