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The temporary deduction applies to so-called pass-through businesses, which report income at the individual level, such as sole proprietorships, partnerships and S corporations, along with some trusts and estates.
“The hope is that this gets extended because it would be very disruptive to a lot of business owners” if the tax break was allowed to expire, said Dan Ryan, a tax partner at law firm Sullivan and Worcester.
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Lawmakers added a temporary QBI deduction to the Tax Cuts and Jobs Act to create a tax rate for pass-through businesses similar to the tax rate for corporations.
However, while the QBI deduction will expire after 2025, the law permanently reduces corporate taxes by lowering the top federal rate from 35% to 21%.
For the 2021 tax year, the most recent data available, there were about 25.9 million QBI claims, up from 18.7 million in 2018, the first year the tax break was available, according to the IRS.
“That’s something that’s really important to a lot of private businesses,” said Howard Gleckman, a senior fellow at the Urban-Brookings Tax Policy Center.
According to Garrett Watson, senior policy analyst and modeling manager at the Tax Foundation, as the 2025 tax cliff approaches, there are “very strong feelings” about whether the QBI deduction needs to be extended.
Business advocates say the tax cuts encourage growth and have pushed for the breaks to be made permanent. Some policy experts and lawmakers, meanwhile, have highlighted the high cost and complexity of the tax cuts.
The QBI deduction is “quite expensive,” with an estimated 10-year cost of more than $700 billion, Watson said. That could pose a challenge amid debate over the federal budget deficit.
Other critics say the QBI deduction primarily benefits the wealthy because high-income earners tend to have immediate income. But there are millions of middle-income taxpayers who also claim the deduction, according to IRS data.
Watson said some Democrats want the tax break to end, “but that goes against the president’s tax promises.”
White House National Economic Adviser Lael Brainard in June reiterated President Joe Biden’s pledge to extend Trump’s tax breaks only to those earning less than $400,000.
