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As President Trump and Republican legislators engage in discussions over a tax reform package aimed at extending certain expiring tax provisions and implementing new tax incentives, a key area of focus will be business taxation. Various business advocacy groups are actively campaigning for the continuation of the 20% qualified business income (QBI) deduction that benefits owners of pass-through entities. Additionally, there is a push to reinstate three significant business tax provisions that have seen reductions in their effectiveness over recent years. Here’s a closer look at each of these important business tax incentives.
1. 20% QBI Deduction
The foremost business tax issue on the table is the 20% QBI deduction. This tax benefit applies to self-employed individuals, independent contractors, agricultural producers, some landlords, and the owners of pass-through entities, which include partnerships, LLCs, and S corporations. These eligible taxpayers can deduct 20% of their QBI, reported on line 13 of their Form 1040, accompanied by either Form 8995 or 8995-A.
QBI represents the business owner’s share of income after relevant deductions have been taken into account. While this concept may appear straightforward, the tax regulations surrounding it can become complex, especially for higher-income taxpayers. For the tax year 2025, those earning over $394,600 (for joint filers) or $197,300 (for others) face two significant limitations when seeking to claim the 20% QBI deduction.
Firstly, the deduction begins to phase out for high earners engaged in specified service trades or businesses (SSTBs), which encompass service-oriented sectors such as healthcare, law, accounting, performing arts, consulting, finance, and more. The IRS provides detailed guidelines for each SSTB, which include a number of exceptions and stipulations. Secondly, for upper-income earners not involved in SSTBs, there exists a limitation based on W-2 wages, which can restrict the allowed deduction based on several factors, including wages and property depreciation.
If Congress does not act, the 20% QBI deduction is set to expire at the end of this year. Originally established under the 2017 Tax Cuts and Jobs Act (TCJA), this deduction was designed to create equitable tax treatment between C corporations, taxed at a 21% rate, and pass-through entities, whose owners might face tax rates up to 37% on their income.
Supporters from the business community are advocating for the permanence of this deduction, rallying congressional Republicans who are currently in negotiations regarding a comprehensive tax reform package. President Trump has emphasized the necessity for enduring tax reductions in his speeches, especially concerning provisions that are scheduled to expire under the TCJA.
Some organizations representing tax professionals and business interests suggest reforming the 20% QBI deduction, with proposals that include the removal of SSTB restrictions for high earners or adjusting the income thresholds that trigger these limitations.
2. First-Year Bonus Depreciation
The TCJA also significantly altered bonus depreciation rules, allowing businesses to deduct 100% of the cost associated with new and used qualifying assets that have been put into service during the fiscal year. However, this provision is temporary. After its full applicability in 2022, it began to taper off, decreasing by 20% each subsequent year: 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, and phasing out entirely by 2027. There is considerable support among businesses for reinstating full 100% bonus depreciation, with President Trump advocating for this change to be effective retroactively from January 2025.
3. Research & Development (R&D)
Prior to changes brought about by the TCJA, businesses were permitted to fully expense their R&D costs in the same year those expenses were incurred. However, starting with tax years after 2021, firms are now required to amortize R&D expenditures over a five-year period, or 15 years if the research is conducted internationally. This shift has prompted significant outcry from the business sector, with many seeking a return to the previous expensing rules, a request that is being taken seriously by legislators on both sides of the aisle.
4. Interest Deductions of Large Companies
The TCJA instituted a limitation on net interest deductions for larger companies, restricting them to 30% of their adjusted taxable income (ATI), with any disallowed interest being carried forward to future tax years. Notably, starting in 2022, the deductions for depletion and amortization began to factor into the calculation of ATI for this purpose. Businesses are urging lawmakers to revert these changes, as removing these deductions from the ATI calculations would effectively increase the allowable interest deductions for many firms.
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