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![handle is hein.crs/goveett0001 and id is 1 raw text is: Congressional
a Research Service
The Debate Over Extending the Section 199A
Deduction
November 8, 2021
The tax law passed by Congress in 2017 (P.L. 115-97; also known as the Tax Cuts and Jobs Act or TCJA)
made significant changes in the taxation of corporate and noncorporate business income. Two key
changes were a permanent cut in the corporate tax rate from a top rate of 35% to a single rate of 21%, and
a temporary deduction for qualified pass-through business income under Internal Revenue Code Section
199A. One consequence of these changes was a shift in the tax incentives for businesses to operate as a C
corporation (whose profits are taxed twice) or a pass-through entity (whose profits are taxed once).
The Section 199A deduction is due to expire at the end of 2025. There is a debate over whether to extend
the deduction and if so, with or without changes. This Insight explains how the deduction is calculated,
examines the arguments for and against the current deduction, and identifies legislation in the 117th
Congress that would alter the deduction's future status.
Calculation of the Deduction
The Section 199A deduction is intended to reduce the tax burden on pass-through business profits. The
maximum deduction is equal to the lesser of (1) 20% of a taxpayer's qualified business income (QBI)
plus 20% of any qualified income a taxpayer receives from real estate investment trusts and publicly
traded partnerships; or (2) 20% of his or her taxable income, excluding long-term capital gains. QBI
comprises a qualified business's items of income, gain, loss, and deduction. Wage income does not
qualify for the deduction. A taxpayer allowed to claim the maximum deduction realizes a 20% reduction
in his or her marginal tax rate. For example, a pass-through business owner taxed at the top individual rate
of 37% would lower that rate to 29.6% for business net income [37% x (1-0.2)] by claiming the
maximum deduction.
The most beneficial scenario for the Section 199A deduction involves a pass-through business owner with
taxable income that does not exceed the deduction's low-income threshold amount ($164,900 for single
filers and $329,800 for joint filers in 2021), which is indexed for inflation.
Calculating the deduction becomes more complicated if taxable income exceeds the low-income threshold
amount. In that case, two limitations phase in for taxable income between that amount and the deduction's
Congressional Research Service
https://crsreports.congress.gov
IN11796
CRS INSIGHT
Prepared for Members and
Committees of Congress](ViewImageLocal?handle=hein.crs/goveett0001&div=1&collection=&method=preview&ext=.png&size=3)