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Tax Committee Members Continue to Pursue QBI Deduction Increase

Tax Committee Members Continue to Pursue QBI Deduction Increase

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    The House-passed version of the One Big Beautiful Bill Act (OBBBA), H.R. 1, would have increased the Qualified Business Income (QBI) deduction from 20% to 23%. This proposal did not make it into the final Act, although the deduction was made permanent, the income phase-outs were increased and a $400 minimum was instituted for active businesses. Now, seven Republican committee members have circled back around to again advance QBI deduction increase legislation.

    Lawmakers Renew Efforts to Increase QBI Deduction to 23%

    H.R. 8415, the Small Business Tax Cut Act, would increase the permanent QBI deduction from 20% to 23%. According to bill sponsor Rep. David Kustoff (R-TN), the legislation also would:

    • Modernize the income thresholds and phaseouts to replace the sharp “benefit cliff” many face under current law;
    • Fix the treatment of “specified service trades or businesses” (SSTBs)—including professions such as doctors, accountants and consultants—so more professionals can benefit from the deduction as income rises;
    • Extend the deduction to qualifying interest dividends from business development companies to small and midsize businesses that cannot access public markets or large-bank financing;
    • Update the inflation rules, including moving the base year from 2018 to 2025 (which likely would raise dollar thresholds at which limitations apply).

    Increase Falls Short Again, Support Continues

    Rep. Kustoff hoped to attach his bill to the latest Department of Homeland Security spending package, P.L. 119-86, but it was not included. That legislation went through the reconciliation process which means it could have included any type of revenue measure. However, the controversy around the bill proved to be too much of a complication for members seeking to add tax policy provisions.

    Still, expect congressional supporters and key groups advocating for passthroughs and small businesses to continue to seek this change. The S Corporation Association, Small Business and Entrepreneurship Council, and National Federation of Independent Business all are vocal supporters of further action on improving the QBI deduction.

    Rep. Kustoff has said he is optimistic there could be “broad Republican support” for the change although proponents would need to find a “pay-for” provision to offset the revenue loss. The Tax Foundation says that increasing the deduction rate to 23% would cost an about $104 billion. “I make the argument, though, that the benefits, from a revenue standpoint, would offset the cost,” Kustoff said in an earlier press release.

    Economic Impact of Passthrough Entities

    According to Rep. Kustoff, more than 90% of U.S. businesses are structured as passthrough entities, including sole proprietors, partnerships, S corporations, farms and family-owned businesses. The Tax Foundation notes that passthrough businesses now employ most of the private-sector workforce and account for about half of business income. The number of passthrough business returns increased from 10.9 million in 1980 to 40.8 million in 2022, while the number of C corporations fell from 2.2 million in 1980 to 1.6 million in 2022, the Foundation reports.

    Not all passthrough businesses are small firms, but rather they span a wide range of sizes. “While most pass-through businesses (80%) employ between 1 and 99 workers, many are large firms with more than 500 employees. In 2023, more than 6.7 million passthrough employees—roughly 7.5 percent of total passthrough employment—worked at firms with 500 or more employees,” the Tax Foundation explains.

    Outlook for Future QBI Changes

    Two points regarding Congress are important. First, a powerful core group of House Republican members on the tax writing committee support further increases in the QBI deduction. Second, Congress never leaves the tax Code alone for very long. In OBBBA, the important consumer deductions, such as tips and overtime, expire after 2028. The higher SALT deduction cap expires after 2029. Because tax provisions rarely make it into unrelated bills, those dates provide the most likely timetable for more changes, like the QBI deduction increase.

    In short, while the QBI deduction remains at 20% for now, this rate could be revisited within the next two to three years. FD will keep you informed of any developments that may affect your planning.

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