What’s Next for 199A?
Enactment of the Big Beautiful Bill was a big beautiful win for Main Street – making permanent the lower tax rates, 20-percent deduction for small and family-owned businesses, and the higher estate tax exemptions. All these provisions help pass-through businesses compete with their larger, publicly-owned competition and they help to protect the 2.6 million jobs that depend on the 199A deduction.
With the bill signed into law, what’s next? This from Bloomberg:
“Everyone’s been coming off the momentum, because we’ve had a lot of wins, and so I think that’s what’s been pushing this idea that we’re going to maybe do a second reconciliation bill,” Curtis Beaulieu, senior policy adviser to Johnson, speaking at an event organized by accounting giant Ernst & Young…
A future bill could include tax measures that didn’t make into the package signed into law, like increasing the passthrough business deduction under Section 199A to 23% from 20%, he said.
So what might 199A 2.0 look like? Here are some ideas:
23 Percent: As Bloomberg notes, the House-passed reconciliation bill sought to bump the 199A deduction by three percentage points. Over 120 Main Street trade associations backed the proposal, citing the economic benefits the change would bring, as well as the need for a more generous deduction amid other longstanding tax hikes squarely targeted at pass-throughs. While that proposal was left out of the final bill, it’s clear there’s support both on Capitol Hill and within the business community for expansion.
Foreign Income: As part of Chairman Smith’s Tax Teams exercise last year, we submitted comments that touched on the inequitable treatment of foreign-source income earned by pass-through businesses. While C corporations are permitted to deduct a significant portion of their foreign earnings and otherwise enjoy favorable treatment under the GILTI regime, pass-throughs are excluded from territorial treatment and pay rates up to 37 percent on their overseas income immediately — without the benefit of the 199A deduction. This discrepancy discourages global investment by American pass-throughs and puts them at a competitive disadvantage when doing business abroad. A future tax package should allow qualified foreign business income to receive the same 199A deduction as domestic income.
199A Deficit Accounts: As we noted earlier this year, current law prevents many pass-through businesses from accessing the 199A deduction due to so-called “199A deficits” — losses incurred in prior years that must be fully recouped before the deduction becomes available again. This restriction has proven especially punitive for businesses that took losses during the pandemic in order to keep their employees on payroll and operations running.
Now that many of these businesses are back in the black, they find themselves unable to benefit from 199A until they run through all their accumulated losses. C corporations, by contrast, face none of these obstacles. NOLs generated by C corporations apply broadly to all income and allow them to reduce taxable income without limitation, all while benefiting from a flat 21 percent rate. Pass-through businesses operate under a far more restrictive regime, with narrower deductions and tighter eligibility rules.
To address this challenge, we proposed a one-time election to wipe out existing 199A deficit balances, enabling affected businesses to immediately reclaim the deduction. This simple change would help businesses harmed by the pandemic and restore the original promise of 199A, ensuring it remains a reliable source of tax relief for millions of family businesses.
Eliminate the SSTB Designation: Another unique feature of the 199A deduction are the so-called “guardrails” that limit its application above certain income levels. Generally, if a business owner’s taxable income exceeds about $500,000, they don’t get the 199A deduction benefit if they are in the wrong industry (professional services) or if they don’t have significant levels of employees and/or investment. According to Treasury, these guardrails have a significant bite and reduce the 199A benefit by about 40 percent.
S-Corp supports some of these guardrails. For example, we first proposed the wage and investment limitation as a means of ensuring the 199A benefit goes to real businesses with real employees and investment. As a business owner, if you don’t create jobs and invest in your community, you don’t get the 199A deduction. Critics of 199A completely ignore this aspect of the law.
The exclusion of certain industries (Specified Service Trade or Business, or SSTB), on the other hand, is an extraordinarily bad policy. Why should a manufacturer with 500 employees get the 199A deduction but an accounting firm with 500 employees is excluded? Don’t accounting jobs matter too? Superficially, the SSTB designation was to prevent professionals whose income derives primarily from their own efforts from getting the deduction, but we already solved that challenge with the wage limitation. Only lawyers and accountants that create jobs get the deduction. The SSTB provision does nothing but punish some business owners because they are in the wrong industry.
With the BBB behind us, it’s time for Congress and Main Street to start the discussion of what comes next. An improved 199A deduction needs to be part of that discussion.
199A on the Line as House Prepares to Vote
With the House preparing to vote as early as today on the Senate-passed reconciliation bill, any lawmakers still undecided should take a close look at what’s at stake for Main Street businesses across the country. Absent congressional action, these businesses will be hit with an unprecedented tax hike, putting millions of jobs and billions in wages and economic growth at risk.
The urgency here stems from the looming expiration of the Section 199A deduction, which sunsets at the end of this year. We’ve done a number of studies in the past showing the benefits of 199A when it comes to achieving rough parity between pass-throughs and publicly-traded corporations. To build on that data we asked EY last year to estimate how much economic activity is supported by the provision, and the numbers are staggering.
According to EY, Section 199A supports 2.6 million jobs, contributes $161 billion to employee compensation, and adds $325 billion to the national economy:
Drilling down on the jobs figures, the study found that 199A supports 1.1 million jobs directly, 590 thousand jobs through increased employee compensation, and another 853 thousand jobs from related consumer spending increases:
That’s why, as Chairman Jason Smith has said repeatedly, “failure is not an option.” Main Street businesses are the backbone of the American economy and supply well over half of all private sector jobs. They rely on Section 199A to hire, reinvest in their communities, and thrive.
As policymakers cast their votes, they should be clear-eyed about the consequences of inaction. Letting Section 199A expire would not just raise taxes — it would undermine millions of jobs, depress wages, and tilt the playing field further in favor of large, publicly traded corporations. It’s up to the House to finish the job and deliver the certainty Main Street needs to keep driving the American economy forward.
Main Street Supports Senate Tax Bill
A strong coalition of Main Street trades came out today in strong support of the Big Beautiful Bill pending before the Senate. A coalition letter signed by more than 90 trade associations reads:
This legislation builds on the foundation laid by the Tax Cuts and Jobs Act and advances a forward-looking, pro-growth tax agenda that supports tens of millions of Main Street enterprises. Critically, it would provide long-overdue certainty to the more than 95 percent of American businesses organized as S corporations, partnerships, and sole proprietorships — businesses that employ a large majority of the private sector workforce and serve as the economic engine of communities nationwide.
Among the most significant provisions for these businesses are the permanent extension of the Section 199A deduction and the retention of the 37-percent top individual rate. These measures reflect the need for a competitive and equitable tax structure that recognizes the importance of rate parity between pass-through businesses and C corporations, and helps ensure that these employers can continue to invest, hire, and grow.
Section 199A permanence has been our top priority for several years, and it’s encouraging to see lawmakers respond with a serious effort to protect Main Street from a looming tax hike. Similarly, while past drafts called for new limitations on SALT deductibility for pass-throughs, the Senate bill goes a different direction:
We also applaud lawmakers for their commitment to ensuring parity when it comes to the deductibility of state and local taxes (SALT) incurred by pass-through businesses. This recently-released draft rightly preserves their longstanding ability to deduct SALT expenses as an ordinary and necessary cost of doing business. This policy reflects a clear understanding that pass-through businesses should not be treated less favorably than their C corporation counterparts and reinforces the principle of equal treatment under the tax code.
Among the other important changes included in the bill is a return to the current Section 461(l) excess loss language, which lawmakers had sought to expand.
There’s a lot to like about this current Senate package. With key wins on 199A permanence, SALT deductibility, excess loss limitations, and other critical provisions, the bill marks a major step toward a more stable and competitive tax environment for pass-through businesses. We look forward to seeing this bill advanced and ultimately being signed into law in the coming days.
Big Main Street Win on SALT
Here’s a good news story to kick off the weekend – Punchbowl News reports that lawmakers are striking the onerous SALT limitation from the reconciliation package as part of a broader compromise between the House and Senate:
The outlet also reports that the White House played a key role in helping broker the deal:
Treasury Secretary Scott Bessent is briefing Senate Republicans behind closed doors at their lunch now about a SALT deal he clinched with the White House and blue-state House Republicans…Speaker Mike Johnson and James Braid, the White House’s legislative affairs liaison, are in the Senate GOP lunch.
Under the arrangement, the SALT cap for individuals would be set at $40,000 with a five-year sunset, along with income limitations. But for Main Street businesses, the far more important piece here is the removal of language that would have prevented pass-throughs from deducting their full SALT, potentially invalidating our longstanding SALT Parity efforts at the expense of millions of companies.
So a huge win for Main Street – particularly when coupled with the permanent extension of Section 199A – but the deal isn’t final yet. It still needs approval from Senate Republicans, none of whom hail from blue states and have therefore been leery of a more generous SALT cap for individuals. That said, Punchbowl News spoke to several GOP aides that expressed confidence Bessent and others could get Senate Republicans on board, so fingers crossed for a positive outcome.
There are still a number of other policy issues to work out, but with momentum clearly on Republicans’ side and President Trump doubling down today on the July 4 timeline for passage, there’s a decent chance the One Big Beautiful Bill gets enacted into law before the end of next week. In the meantime, S-Corp and its allies will be working the phones to express our strong support for the revised tax title and help to get it across the finish line.
Main Street Backs 199A Expansion
With the reconciliation bill process reaching its final stages,120 trade associations today called on the Senate to incorporate a key part of the House-passed bill: an expansion of the 199A deduction from 20 to 23 percent. As the letter states:
Expanding Section 199A will help preserve tax parity between pass-through businesses and larger public corporations while helping ensure the Senate bill does not raise taxes on millions of Main Street businesses.
The Section 199A deduction plays a vital role in preserving competitive neutrality in the Tax Code. The 2017 Tax Cuts and Jobs Act reduced the corporate tax rate from 35 percent to 21 percent. In doing so, it left pass-through businesses – which pay taxes at much higher individual rates – at risk of a long-term competitive disadvantage. Section 199A was adopted to mitigate this imbalance and preserve a level playing field.
Why is an enhanced deduction necessary? Beyond being good policy, it also helps mitigate some of the tax hikes included in the Senate bill:
The Senate bill would make permanent the 199A deduction but also would cut in half their ability to deduct State and Local Taxes (SALT) as a business expense. The net result will be a tax hike on millions of pass-through businesses relative to what they currently pay.
Expanding 199A deduction would offset this tax hike. It builds on a policy with a proven track record. Since its enactment, Section 199A has helped tens of millions of Main Street businesses reinvest in their operations and workforce. Data from the IRS and Treasury confirm that the deduction’s benefits flow to job creators in every community and every congressional district in the country. The deduction represents a critical tool for weathering economic headwinds and remaining competitive in an increasingly consolidated marketplace.
The House-passed expansion to 23 percent is modest but meaningful. It ensures that the Tax Code reflects the economic reality pass-through businesses face and recognizes their role as America’s leading source of private-sector employment.
With the reconciliation bill nearing the finish line, the Senate has a real opportunity to deliver certainty, fairness, and economic strength to the backbone of the U.S. economy. Lawmakers should seize it by adopting the House’s 199A expansion and ensure that Main Street doesn’t shoulder a tax hike in the final package.