Sen. Ron Wyden (D-Ore.) speaks during a Senate Finance Committee nomination hearing to Adewale Adeyemo, Deputy Treasury Secretary nominee, on February 23, 2021.
Greg Nash | Pool | Reuters
Ron Wyden, D-Ore. is the Chairman of Senate Finance Committee. He released Tuesday a bill that would overhaul a controversial deduction for some businesses. It was part sweeping tax legislation by Republicans 2017.
The qualified business income deduction (also known as 199A) allows certain businesses such as sole proprietors and partnerships to write off up 20% of their net income.
Wyden said that the bill would end the tax break for households with incomes greater than $400,000 each year, keeping President Joe Biden’s campaign promise.
He also stated that the proposal expands eligibility for the writeoff by removing “extraordinarily arbitary restrictions” on which industries can be eligible.
More information about personal finance:
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Democrats’ budget prohibits higher taxes for those earning less that $400,000
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2021: Individuals earning less than $164,000. Couples filing jointly who earn less than $329,000.80 may be eligible for the full 20% deduction
However, households with incomes above these thresholds may not be eligible for the entire deduction. Certain types of businesses also lose eligibility.
For example, so-called service trades or businesses — which includes heath, law, financial services and more — don’t qualify above certain income levels.
Wyden’s phaseout is for those above $400,000, and the deduction will be eliminated completely at $500,000.
Wyden stated that there is an opportunity to make significant revenue and not raise taxes on Main Street small business owners.
As Democrats work out how to pay priorities like education, healthcare, childcare, paid time, green energy, and more, the proposal is now available.
According to a White House official Joe Biden is open for new ideas to raise taxes on the rich, provided it doesn’t impact those earning less than $400,000
Who benefits from the deduction
Wyden noted that pass-through U.S. businesses can include both small and large companies. However, Wyden suggested that the tax break may be disproportionately beneficial to wealthy Americans.
He stated that half of the monetary benefits go to millionaires, and that because the benefit is so skewed towards top-level business owners, many Main Street small business owners were actually excluded.
According to a report by the Center on Budget and Policy Priorities, households with higher incomes are eligible for a greater portion of the pass through business tax break than those in the middle-class.
According to a Joint Committee on Taxation, 61% of benefits could go to the top 1 percent of families by 2024.
The bill has some support from small business groups. However it could be challenged by others as well as Republican lawmakers.
“Sen. Wyden’s proposal to limit the small business deduction and raise taxes on small businesses is the wrong plan at the wrong time,” said Kevin Kuhlman, Vice President of Federal Government Relations at the Nashville-based National Federation of Independent Businesses.
He said that reducing the qualified income deduction would directly affect small businesses’ ability, investment, and compensation and could pose a threat to the fragile economic recovery.
Without Congress’ extension, the current deduction will expire in 2025.
(Clarification. The story has been updated so that net income is the type of income that is eligible for the tax break.