Legislation to make permanent the section 199A deduction for qualifying noncorporate business income has been introduced in both the House and Senate. The legislation is partisan—only Republicans cosponsored it in both chambers of Congress—but the number of cosponsors (35 in the Senate, including most of the Senate GOP’s leadership, and 152 in the House) demonstrates the strength of support for the measure.

The Main Street Certainty Act does not change Section 199A; it only removes the rule’s expiration date. Section 199A provides for a 20 percent deduction for certain business income earned by pass-through entities—i.e., partnerships, Subchapter S businesses, and sole proprietorships. However, there are limits on who qualifies for the section 199A deduction, including those imposed on workers in the financial services industry. NAIFA supports easing those limits so that the deduction is usable by more NAIFA members.

 Lead sponsors of the legislation are Sen. Steve Daines (R-MT) in the Senate and Rep. Lloyd Smucker (R-PA) in the House. In addition to NAIFA, supporters of the bill include the National Federation of Independent Business (NFIB), the S Corporation Association and the U.S. Chamber of Commerce.

Section 199A was enacted as part of the Tax Cuts and Jobs Act (TCJA) in late December of 2016. It was designed to provide equitable tax relief for noncorporate businesses in light of the TCJA cut in the corporate income tax rate from 35 percent to 21 percent. Due to budget law (reconciliation) rule requirements, the 199A deduction is set to expire at the end of 2025. The corporate rate cut, however, does not expire, although it may change during the process of enacting a 2025 tax bill. Because of this interaction between the corporate rate and section 199A, changes to the corporate tax rate may trigger attempts to change the section 199A deduction.

Prospects: Washington insiders give good odds for prospects for extending section 199A. It is a key provision in the high-priority effort to extend (or make permanent) most if not all of the TCJA’s expiring individual and estate tax rules. Efforts to expand the deduction, however, face longer odds, largely due to revenue considerations.

President Trump has called for a cut in the corporate tax rate to 15 percent. Other lawmakers (including some Republicans) have thrown out the possibility of increasing the corporate tax rate (to raise some offsetting revenue). A change in the corporate tax rate is very likely to raise issues relating to the scope of section 199A. All of this is embroiled in the overall revenue issue and is highly controversial. While prospects for preventing expiration of section 199A are good, it is by no means a done deal, and changes to it—possibly positive but also potentially adverse—are probably going to be at least debated. This issue, like many others, will be hard-fought as the process for the 2025 tax bill moves forward.

NAIFA Staff Contact: Jayne Fitzgerald – Director – Government Relations, at jfitzgerald@naifa.org.