Reports

Expiring Tax Breaks Worth Trillions Could Disrupt Business Owners After 2025

Tax breaks amounting to trillions of dollars are set to expire after 2025 unless Congress acts to extend them. Among these is a significant deduction for millions of self-employed individuals and business owners. This tax break, known as the qualified business income deduction (QBI), was introduced by the Tax Cuts and Jobs Act of 2017, signed into law by former President Donald Trump. The QBI deduction allows eligible business owners to deduct up to 20% of their qualified business income, although it comes with certain limitations.

Impact on Pass-Through Businesses

The QBI deduction is particularly important for pass-through businesses, which include sole proprietorships, partnerships, S-corporations, and some trusts and estates. These businesses report their income at the individual level, making the QBI deduction a critical tax benefit. Dan Ryan, a tax partner at Sullivan and Worcester, emphasized the importance of extending this deduction, stating, "The hope is that this gets extended because it’s going to be very disruptive for a lot of business owners if the tax break is allowed to expire."

Personal Finance Implications

The potential expiration of the QBI deduction is just one aspect of a broader financial landscape affecting many Americans. For example, student loan borrowers are seeking relief amid ongoing legal challenges, and issues with college financial aid have significantly impacted students. Additionally, Gen Z homebuyers are increasingly purchasing fixer-upper homes, with some already expressing regret over their decisions.

Legislative Background and Corporate Tax Rates

The QBI deduction was a temporary measure included in the Tax Cuts and Jobs Act to align tax rates for pass-through businesses with those for corporations. While the QBI deduction is set to expire after 2025, the legislation permanently reduced the corporate tax rate, lowering the top federal rate from 35% to 21%. This disparity has led to calls from business advocates to make the QBI deduction permanent to maintain a level playing field between different types of business entities.

Increasing QBI Claims

According to the IRS, there were approximately 25.9 million QBI claims in the 2021 tax year, up from 18.7 million in 2018, the first year the deduction was available. Howard Gleckman, a senior fellow at the Urban-Brookings Tax Policy Center, highlighted the importance of this deduction, stating, "It’s something that is very important to a lot of privately held businesses."

Strong Opinions on Extension

As the 2025 deadline approaches, there are strong opinions on both sides regarding the extension of the QBI deduction. Garrett Watson, a senior policy analyst and modeling manager at the Tax Foundation, noted that there are "very strong feelings" about whether to extend the deduction. Business advocates argue that the deduction promotes growth and are pushing for it to become permanent. However, some policy experts and lawmakers raise concerns about the cost and complexity of the deduction.

Financial Impact of the QBI Deduction

The QBI deduction is costly, with an estimated 10-year cost exceeding $700 billion, according to Watson. This significant expense poses a challenge amid ongoing debates over the federal budget deficit. Critics argue that the deduction primarily benefits the wealthy, as higher earners are more likely to have pass-through income. However, IRS data shows that millions of middle-income taxpayers also claim the deduction, underscoring its broad impact.

Political Dynamics and the President’s Tax Pledge

The political dynamics surrounding the QBI deduction are complex. Some Democrats are keen to see the tax break expire, but this stance conflicts with President Joe Biden’s tax pledge. White House National Economic Advisor Lael Brainard reiterated in June that Biden is committed to extending Trump’s tax breaks only for those making less than $400,000. This promise adds another layer of complexity to the ongoing debate over the future of the QBI deduction.

Broader Financial Context

The discussion about the QBI deduction is part of a larger conversation about financial policies and their impact on Americans. For instance, student loan borrowers are looking for reliable relief options amidst legal uncertainties. Similarly, issues with FAFSA and college financial aid have caused significant problems for students seeking higher education funding. Additionally, the trend of Gen Zers buying fixer-upper homes highlights the challenges and potential regrets faced by young homebuyers.

Future of Tax Policy

As the expiration date for the QBI deduction approaches, the future of tax policy remains uncertain. Lawmakers will need to weigh the benefits of extending this deduction against its financial costs and the broader implications for the federal budget deficit. Business advocates will likely continue to push for a permanent extension, emphasizing the deduction’s role in promoting growth and supporting privately held businesses.

Conclusion

In conclusion, the potential expiration of the QBI deduction represents a significant challenge for many business owners and self-employed individuals. The deduction has provided substantial tax relief since its introduction in 2017, but its future is now in jeopardy. As the debate continues, it will be crucial for lawmakers to consider the full impact of their decisions on the economy and the millions of Americans who benefit from this tax break.