Expiring Business Tax Breaks And Trump's Tax Plan

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As President Trump and Republican tax writers on Capitol Hill negotiate a tax package to extend expiring tax provisions and enact other tax breaks, they will have to consider business taxes. Business lobbying groups are pushing hard for an extension of the 20% qualified business income (QBI) deduction for owners of pass-through businesses. In addition, they want to bolster three business tax provisions that have been watered down over the last few years. We delve into each of the four business tax breaks below.

1. 20% QBI Deduction

The most important business tax provision that lawmakers need to address is the 20% QBI deduction. The QBI write-off is for self-employed individuals, independent contractors, farmers, some landlords, and owners of pass-through entities (such as partnerships, LLCs and S corporations). Eligible individuals can deduct 20% of their QBI. They claim it on line 13 of their Form 1040 and attach Form 8995 or 8995-A to their returns.

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QBI is one's allocable share of income, less deductions from a business. This seems easy, but the rules can quickly get complicated, especially for upper-income individuals with 2025 incomes over $394,600 for joint filers and $197,300 for others (the income thresholds for 2024 returns are $383,900 for joint filers and $191,950 for others). Two special limitations apply for these upper-income taxpayers when claiming the 20% QBI deduction.

• First, the tax break phases out for upper-income individuals in specified service trades or businesses (SSTB). An SSTB is a business involving the performance of services in certain fields: Health, law, accounting, actuarial science, performing arts, consulting, athletics, finance, brokerage, investment management, and securities trading and dealing. IRS regulations delve into each SSTB and set forth lots of rules and exceptions.
• Second, there is a W-2 wages-paid limitation that applies for upper-incomers not engaged in an SSTB. It caps the deduction at 20% of QBI from the business or, if lower, a figure based on wages paid by the business and the unadjusted basis of tangible, depreciable property used in the business and not fully depreciated.

Unless Congress acts, the 20% QBI deduction ends after this year. It was first enacted in the 2017 Tax Cuts and Jobs Act (TCJA) to provide some federal income tax parity between C corporations, which are taxed at a 21% federal tax rate, and pass-through businesses, in which the individual owners pay income tax on earnings up to a 37% federal tax rate.

Lobbying groups representing Main Street businesses want to make the 20% QBI deduction permanent. And they have support from congressional Republicans in the House and Senate who are in the midst of negotiating a big tax package. President Trump, in his address to Congress, has called for permanent income tax cuts all across the board in referring to the expiring TCJA provisions.

Some tax professional groups and business groups want the 20% QBI write-off expanded. For example, the American Institute of CPAs has proposed removing the SSTB limitations for upper-income individuals, or alternatively, increasing the monetary thresholds before the limit applies.

Others call for simplifying the 20% QBI deduction, citing the complexity of the rules, especially the ones that apply to upper-income individuals.

But extending or making permanent the QBI deduction would cost the government a boatload of money. This popular tax break is in the top 10 largest individual income tax expenditures, rounded up by the staff of the bipartisan congressional Joint Committee on Taxation.

2. First-Year Bonus Depreciation

The 2017 TCJA expanded bonus depreciation by allowing businesses to deduct 100% of the cost of new and used qualifying assets with lives of 20 years that are first put into service during a year. However, that same law also made bonus depreciation temporary. The full break lasted through 2022 and then started to phase out 20% for each succeeding year. It was 80% in 2023 and 60% in 2024. For 2025, the break is 40%. Next year it's 20%, and it disappears in 2027.

Businesses want 100% bonus depreciation revived, and they have the ears of their representatives and senators. President Trump, in his address to Congress, called for 100% bonus depreciation to be revived and also said the expanded tax break would be made retroactive to Jan. 20, 2025.

3. Research & Development (R&D)

Before 2022, businesses could fully expense their R&D costs in the year the expenses were incurred. The TCJA changed this for tax years that started after 2021. Businesses are required to amortize their R&D expenses over five years (15 years for international research). Businesses have since been clamoring for a return to the old rules, and House and Senate Republicans are listening closely to these demands.

4. Interest Deductions of Large Companies

The TCJA limited many big firms' net interest write-offs on business debts to 30% of adjusted taxable income (ATI), with disallowed interest carried forward. Starting with tax years that began in 2022, depletion and amortization write-offs are accounted for in computing a firm's ATI for this purpose. Businesses want the post-2022 change reversed. Eliminating these two deductions from the ATI calculation would increase ATI, thus letting firms deduct more interest than if the two deductions were included.

This first appeared in The Kiplinger Tax Letter. It helps you navigate the complex world of tax by keeping you up-to-date on new and pending changes in tax laws, providing tips to lower your business and personal taxes, and forecasting what the White House and Congress might do with taxes. Get a free issue of The Kiplinger Tax Letter or subscribe.

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