Will Section 199A Deduction Get Changed?

• July 20, 2021
• Paul Neiffer

Senate Finance Committee Chairman Senator Ron Wyden (D-OR) introduced a bill to make changes to the Section 199A deduction.  The key changes are as follows:

• The Section 199A deduction would be eliminated for trusts and estates.
• It would raise the threshold to $400,000 but would completely phase-out the deduction once your taxable income (before the deduction) reaches $500,000. 
• There would no longer be any limit based on a phase-out of the deduction based on income and W-2 wages or investment in business assets.  This would substantially simplify the calculation of the deduction but the previous section would eliminate the 20% deduction for higher-income farmers.
• The DPAD deduction from cooperatives would still be allowed even if your income is over $500,000.
• The $400,000 threshold applies for singles and married couples (even more of a marriage penalty) and in order to claim the deduction married couples must file jointly.
• All business income would qualify.  There would no longer be a distinction between specified service income and other income.  All income qualifies, but once you go over $500,000 of taxable income, no Section 199A deduction other than the DPAD deduction.
• Cooperatives must compute their DPAD deduction using W-2 wages that are more restrictive than under current rules.
• Taxpayers would no longer have to calculate 199A deduction business-by-business.  You would simply add it all together and take your 20% deduction on the smallest of taxable income (after deducting capital gain income), qualified business income, or the phased-out threshold amount.
• Publicly Traded Partnership (PTP) income would no longer qualify for the deduction. 

The proposal does simplify the calculation which would be welcome, however, once your income goes over $500,000, no 20% 199A deduction is allowed; the DPAD from cooperative remains available even if your income goes over this level.

The ranking Republican member of the House Ways & Means Committee, Rep. Kevin Brady, has already called the Wyden bill “an idea that needs to be killed.” We will keep you posted.

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