Debate: Is the 20% Business Income Deduction Worth It?

As 2025 approaches, members of Congress are evaluating many of the 2017 tax reform provisions that are scheduled to expire after 2025. One provision gaining significant attention is the 20% Section 199A deduction for qualified business income of pass-through entities.

A pass-through entity is entitled to deduct 20% of qualified business income (which generally excludes service business income, although service businesses with income that falls below the annual threshold levels also qualify for the deduction). When income exceeds the relevant threshold, the deduction is capped at the greater of:

• 50% of W-2 wage income, or
• the sum of 25% of the W-2 wages of the business, plus 2.5% of the unadjusted basis, immediately after acquisition, of all qualified property. 

We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints — Robert Bloink and William H. Byrnes — to share their opinions about the impact of the Section 199A deduction as it currently exists.

Below is a summary of the debate that ensued between the professors.

Byrnes

Bloink

Byrnes: This relatively new QBI deduction has essentially leveled the playing field between corporations and pass-through entities. When the corporate tax rate was slashed to 21%, business owners would have been making the choice between the potential 37% tax rate for pass-throughs and that much lower corporate tax rate. Making critical business decisions based solely on tax liability rarely results in the best outcome.

Bloink: The 20% QBI deduction has ended up offering yet another tax loophole for the wealthy. Yes, it’s beneficial for small business owners who might otherwise have been forced into the corporate structure. It’s also given wealthy corporations yet another option for reducing their federal income tax liability.