Clients with certain pass-through entities need to know about a new bill that could affect their taxes.
The Small Business Tax Fairness Act, recently introduced in the Senate by Sen. Ron Wyden (D-OR), aims to reorganize the Sec. 199A qualified business income (QBI) deduction for pass-through entities. The possible eventual result: stricter conditions in the form of lower income thresholds to take the deduction completely, but with the deduction becoming available to owners of more varieties of businesses, including investment advisors.
Tax reform of 2017 provided a 20% QBI deduction to pass-through businesses but phased out the deduction for professionals such as accountants, attorneys, doctors, athletes, consultants and entertainers whose incomes exceeded certain thresholds. Other businesses were able claim bigger deductions.
The proposed income-level phaseout would apply to taxable income exceeding $400,000, with a full phaseout at $500,000, said Andrew Bass, a CPA at Telemus, a Southfield, Mich.-based RIA.
“The proposal is being advertised as a simplification to include more small business owners and a limitation to keep some unintended beneficiaries from utilizing the current deduction. This is proposed to be accomplished by striking the limitation on specified service businesses like doctors, lawyers, accountants and financial advisors and applying a single red line limitation allowing only those pass-throughs making less than $400,000 to claim the deduction,” said Casey H. Pisano, wealth advisor with Biondo Investment Advisors in Milford, Pa.
The proposal would also deny the deduction for estates and trusts and married filling separate taxpayers, he added, and would limit income flowing through from real estate investment trusts, “which would hurt Main Street investors who cannot afford to diversify in single property investments and need REITs for diversification,” Bass said.
“For many taxpayers, QBI is a mystery,” added W. Thomas Gibson Jr., a CPA at Tax Saving Professionals in Vero Beach, Fla. “It shows up on their return and they don’t know what it is or how it got there. Because of that, I’m sure most people are totally unaware of Wyden’s proposal.”
“The [current] deduction has been severely criticized as overly complex,” added Jere Doyle, an estate planning strategist at BNY Mellon Wealth Management in Boston, adding that the act would simplify calculating the deduction.
Robert Dietz, director at Bernstein Private Wealth Management in Minneapolis, said the proposal aims to eliminate the distinction between a specified service trade or business (SSTB) and a non-SSTB. “The bill would [also] allow for QBI to be calculated on an aggregated basis ... for all qualified items of income, gain, deduction and loss across a taxpayer’s qualified trades or businesses,” he said.
“One change we’re watching closely is how the QBI deduction would interact with a taxpayer’s net capital gain,” Dietz added. “From the bill, the amount of the deduction under 199A would appear to be reduced by the taxpayer’s net capital gain for the year. This may prompt us to prioritize capital-gain deferral strategies for certain clients so that they can maximize their deduction.”