Small Business Tax Fairness Act

The Small Business Tax Fairness Act, introduced in July by Senate Finance Committee Chair Ron Wyden, D-Ore., would expand eligibility for middle-income “service” business owners by removing restrictions included in the Tax Cuts and Jobs Act.  

Currently, pass-through business owners are able to take a 20% qualified business income deduction (QBID) on their personal tax return. QBI is the net income (profit) a pass-through business earns during the year. Business owners can take the full deduction if their total income is under the threshold.

For 2021, the threshold is taxable income up to $329,850 if married filing jointly, or $164,925 if single. There is a “phase-in range” which includes taxable income $100k above the threshold amount for joint filers, or $50k for single filers. The deduction amount in the phase-in range is limited by the amount of W-2 wages paid, and the UBIA of qualified property held by the business.

For businesses that are considered a specified service trade or business (SSTB) the deduction is phased out. Both non-service and service business owners must follow formula to determine how much their QBID will if they are over the threshold. However, “service” business owners are subject to a more restrictive deduction calculation in the phase-out range. Their deduction goes away completely if total income is above the phase-in range.

The deduction for non-service business owners with income above the phase-in range is limited to 50% of W2 wages paid, or 25% of W2 wages paid plus 2.5 of the qualified property’s basis, whichever is greater.  

The limitations on the QBID is confusing for taxpayers trying to determine not only if their business qualifies, and but how much the deduction will be. The bill aims to make it easier to make that determination easier by simplifying the calculations used.  

A threshold of $400,000 would be established for determining whether a taxpayer gets the deduction, and a single definition of what qualified business income is will apply to all taxpayers. The deduction would phase out for those earning more than $400,000.