House Democrat bill expands QBI tax break for small business

Rep. Gwen Moore, D-Wisconsin, a member of the tax-writing House Ways and Means Committee, introduced legislation Thursday to expand the Section 199A Qualified Business Income deduction to provide a bigger benefit to the smallest businesses.

The Mom and Pop Tax Relief Act, H.R. 3249, would let businesses deduct $25,000 of their QBI, giving small businesses with lower revenues an advantage. The deduction would phase out at $200,000 of QBI for single filers and $400,000 of QBI income for joint fillers, providing targeted tax relief to small businesses.

The Tax Cuts and Jobs Act of 2017 created the Section 199A deduction, which allows businesses to deduct 20% of their pass-through income from their federal income taxes. Like many of the other provisions of the TCJA for individuals and small businesses, the QBI tax break is due to expire at the end of 2025. It was included in the TCJA as a way to provide a tax break for small businesses and pass-through entities like S corps and partnerships, after the TCJA provided a “permanent” tax cut for C corporations by reducing their top tax rate to 21%. 

However, critics of the TCJA point out that the QBI deduction disproportionately benefits the wealthy. Congress’s Joint Committee on Taxation estimates that more than half of the tax benefits of Section 199A continue to benefit millionaires, while the average small business with less than $100,000 of gross income receives a tax break of less than $2,000.

“Small businesses are the backbone of our economy but are feeling tremendous pressure in Trump’s economy, especially as they work with a tax code that favors wealthy businesses,” Moore said in a statement Thursday. “Section 199A is a prime example of how Republicans’ Tax Cuts and Jobs Act became a giveaway for the wealthiest Americans. Right now, this provision is working against our smallest businesses while rich individuals and high-grossing companies can exploit loopholes to further enrich themselves. If Republicans were truly serious about helping Main Street, they would support my legislation to ensure that mom and pop businesses can feel meaningful relief from the Section 199A deduction.”

The Mom and Pop Tax Relief Act is co-sponsored by Rep. Nydia Velazquez, D-New York, who serves as ranking member of the House Small Business Committee, as well as Rep. Betty McCollum, D-Minnesota, George Latimer, D-New York, Judy Chu, D-California, and Danny Davis, D-Illinois. 

However, with Republicans in control of both chambers of Congress and the White House and using a reconciliation procedure to steer their tax bill without relying on Democrats’ votes, the QBI bill is unlikely to be included in the massive legislation extending the TCJA and adding other tax breaks for tips, overtime pay and Social Security income.

Proponents of the bill point out that 74% of the current Section 199A pass-through tax deduction benefit goes to the wealthiest 5% of businesses. While the highest earning pass-through entities claimed an average deduction of over $1 million in 2021 due to Section 199A, pass-throughs with adjusted gross incomes below $100,000 took home an average deduction of just $1,997. The bill would significantly increase the tax savings for Main Street businesses, compared to the current 20% deduction. 

Advocacy groups praised the legislation. “Small businesses today are grappling with crippling uncertainty, due mainly to tariffs and the rollback of federal resources that support small firms,” said Small Business Majority CEO John Arensmeyer in a statement. “Now more than ever lawmakers must focus on offering benefits to the most vulnerable small businesses, and updating Section 199A in a way that helps the overwhelming majority of Main Street firms is one of the best ways to do that. We applaud Rep. Moore for her commitment to revising our tax code in order to deliver real results for most small businesses.”

“When the Tax Cuts and Jobs Act passed in 2017 during the first Trump Administration, the Main Street Alliance fought to make the U.S. Tax Code more equitable,” said Main Street Alliance executive director Richard Trent in a statement. “Unfortunately, policy makers at the time prioritized large corporations and the wealthy over entrepreneurs and growing businesses. Now is the time to correct course and better target tax relief to businesses who are just getting started, and trying to grow.”