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Negotiating Tax Packages: Business Taxes and Tax Breaks
As President Trump and GOP tax writers discuss a tax package to extend expiring tax provisions and implement additional tax breaks, the conversation around business taxes is inescapable. Lobbying groups are advocating for an extension of the 20% QBI deduction for pass-through business owners and strengthening three business tax provisions recently weakened. Below, we explore these four business tax breaks in detail.
Understanding the 20% QBI Deduction
Lawmakers’ primary focus is the 20% QBI deduction—vital for self-employed individuals, independent contractors, farmers, some landlords, and owners of pass-through entities like partnerships, LLCs, and S corporations. Eligible individuals can deduct 20% of their QBI on line 13 of their Form 1040 by attaching Form 8995 or 8995-A to their returns. The QBI’s complexity may seem daunting, particularly for upper-income individuals, but understanding its limitations and potential can help you make informed decisions about tax deductions.
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The Future of the 20% QBI Deduction
Without Congressional intervention, the 20% QBI deduction will end this year. Implemented in the 2017 Tax Cuts and Jobs Act (TCJA), the 20% QBI deduction aimed to create federal income tax parity between C corporations, taxed at a 21% rate, and pass-through businesses subject to a 37% tax rate. Some tax professionals and business groups are advocating for an expansion of the 20% QBI write-off, citing the complexity of existing rules. However, extending or making the QBI deduction permanent would significantly impact government finances, as this widely-used tax break ranks among the top 10 individual income tax expenditures.
First-Year Bonus Depreciation
The 2017 TCJA expanded bonus depreciation, allowing businesses to deduct the total cost of new and used qualifying assets placed in service during a year. However, the law also made bonus depreciation temporary, starting to phase out after 2022. Businesses are now advocating for the revival of 100% bonus depreciation.
Research & Development (R&D) Changes
Prior to 2022, businesses could fully expense their R&D costs in the year of expenditure. Starting after 2021, businesses must amortize their R&D costs over five years (15 for international research). Many businesses, backed by House and Senate Republicans, are pushing for a return to the old rules.
Addressing Large Companies’ Interest Deductions
The TCJA limited many large firms’ net interest write-offs on business debts to 30% of ATI, with disallowed interest carried forward. Starting in 2022, depletion and amortization write-offs were included in a firm’s ATI calculation. Many businesses are advocating for a reversal of this post-2022 change.
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