Tax Nerds Gone Wild
Main Street supports the tax bill adopted by the Ways and Means Committee this week, but not all the bill’s provisions are worth keeping. The House provision limiting SALT deductions on pass-throughs is a good example of why the “experts” need close supervision. These provisions are hopelessly complicated and will hurt members of the very Main Street business community this bill is supposed to help.
First, some history. The TCJA imposed a new $10,000 cap on individual SALT deductions. It did not cap the SALT deductions of business entities, so corporate SALT (C-SALT) and any SALT paid by pass-through entities directly continued to be deductible as a business expense.
This approach put pass-throughs at a disadvantage as most B-SALT is paid by the owners, not the entity. This was a big deal – losing the SALT deduction was equal to a 2-5 percentage point tax hike and effectively reduced the 199A benefit by about a third. The Main Street Employer coalition largely restored the lost deduction by encouraging 36 states to adopt our SALT Parity bills. (You can read the full history of our SALT Parity efforts here.)
The tax bill before the House would roll back about 40 percent of those deductions. At a high level, the changes preclude B-SALT deductions on business income that is designated as Specified Services Trade or Business (SSTB) income under Section 199A. How this works is remarkably complicated. Here is our best take:
- Pass-through entities need to test if their SSTB income exceeds 25 percent of their aggregated business income. If it does, they are precluded from deducting any of their B-SALT as a business expense. This test requires business owners to engage in a complicated aggregation of all their income from related business entities. (More on that below.)
- For entities that pass the test, they may deduct their SALT as a business expense, but only on non-SSTB income. For example, if a business has 20 percent SSTB income and 80 percent non-SSTB income, they get the B-SALT deduction on the 80 percent only.
- Finally, any B-SALT paid on SSTB income must be newly reported to the business owners and then subject to the individual SALT cap.
It’s a “belt-and-suspenders” approach, but is all this really necessary? Clearly not. Here are some concerns:
Complexity 1: S-Corp strongly disagrees that B-SALT needs to be restricted. If Congress is determined to proceed, however, why do it in such a complex manner? Why not just exclude SSTB income from B-SALT deductions? Why drag millions of businesses through a super complex, yet-to-be drafted 75/25 aggregation test when the provision already excludes SSTB income from the B-SALT deduction anyway?
Complexity 2: The bill would create two separate and conflicting rules for determining qualified income – the existing rule for determining qualified income under Section 199A and a new, much more punitive aggregation rule for determining B-SALT deductions. Since the bill already relies on Section 199A for the SSTB rules, why not use the 199A aggregation rules too?
It is an Election: On that note, why bother with the new K-1 reporting regime? If SSTB income is precluded from B-SALT deductions at the entity level, why force pass-throughs also to report their SSTB deductions separately to their owners? They are highly unlikely to get any benefit. We designed the PTET deduction as an election in order to side-step all this complexity. If you don’t benefit from a PTET tax, don’t make the election. No reporting required.
Parity 1: The argument against B-SALT deductions is that it disadvantages wage earners who are subject to the individual cap, but wage earners enjoy benefits not available to business owners. They get employer-paid FICA and HI taxes and tax-exempt benefits like health insurance coverage. It is not at all obvious who gets the best deal, an issue we addressed previously here.
Parity 2: As noted above, the reason our SALT Parity laws work is because Congress elected not to cap C-SALT deductions. In this bill, Congress again elected not to cap C-SALT, yet they are targeting B-SALT. How does that make sense? The benefit is the same. A C corporation deducts its C-SALT from its income leaving it more resources to invest and create jobs, while any subsequent payments to shareholders will reflect the added value of those deductions.
Parity 3: By tying the B-SALT changes to Section 199A, businesses operating as an SSTB are in for a double whammy – their income doesn’t get the 199A deduction and under the House bill it will be excluded from SALT deductions too. Senators and Representatives should be prepared to hear from the excluded industries. When a constituent business owner complains about tax hikes under this bill, this is what they are talking about.
The House bill is important to Main Street. Absent action, pass-through businesses face a historically large tax hike next year. That said, the bill adds to the tax disparity between corporations and pass-throughs — corporations get substantial tax relief with almost no offsetting provisions, whereas pass-throughs are subject to a mixed bag of benefits and costs.
Several of those costs are hopelessly complicated provisions that will excite tax nerds and enrich accountants, all at the expense of Main Street businesses. The B-SALT deduction limitation is foremost among these, and it needs to be scrapped.
Main Street Backs Tax Package
More than ninety trade associations came out in support of a broad tax package before the House Ways & Means Committee later today. The legislation builds on the TCJA by making permanent and expanding several key provisions important to America’s pass-through community.
As the letter reads:
This legislation would provide certainty to the more than 95 percent of all American businesses structured as S corporations, partnerships, and sole proprietorships. These pass-through businesses employ 62 percent of the private sector workforce and form the economic backbone of virtually every community nationwide.
Provisions key to the Main Street community include increasing the Section 199A deduction to 23 percent while making it permanent. This provision recognizes the importance of parity in the tax code by bringing down marginal tax rates for the 26 million businesses that rely on the 199A deduction. Coupled with a permanent 37 percent top rate, the legislation would lower the top rate paid by pass-throughs and bring it closer to parity with the 21-percent corporate rate.
Another key feature is the commitment to reducing the bite of the estate tax:
Main Street also strongly supports provisions to enhance and make permanent the estate tax exemption. Reducing the bite of the estate tax while eliminating the uncertainty surrounding its application will help preserve countless Main Street businesses, sustain jobs, and help ensure these enterprises can remain family-owned for generations to come.
That said, the House tax bill is not perfect. It includes numerous needlessly complicated provisions, several of which are targeted directly at small and closely-held businesses:
Certain provisions should be improved. The limitation on SALT deductions for certain pass-through entities is needlessly broad and complex, while tightening and extending the cap on excess losses would make worse a policy that should never have been enacted in the first place.
S-Corp and its allies will continue to work with the House and Senate to address these concerns.
On the whole, this bill represents a significant step forward, particularly in comparison to the existential threat facing the Main Street business community if Congress fails to act. There remain major hurdles to overcome before it becomes law, but there’s plenty of reason for pass-throughs to be optimistic about this bill. It is an excellent starting point and Main Street supports it.
Rate Hikes Still in Play
The White House as recently as yesterday was actively pushing lawmakers to include a rate hike in Tuesday’s Ways & Means markup, with Commerce Secretary Howard Lutnick telling reporters the rate hike was a “smart” move. Then this morning President Trump appeared to back off the effort, posting the following:
An hour later NEC Director Kevin Hassett appeared on CNBC and when asked about the proposal said the President is “not thrilled about it…it’s not high on the President’s list.”
So it’s anyone’s guess where things stand over at the Administration, but we do know that Main Street remains staunchly opposed to rate hikes. As our trade association letter signed by more than 90 of our allies made clear, the proposal would be devastating for millions of pass-through businesses:
The so-called “millionaire tax” in question…would saddle Main Street with a tax hike that offsets about half the tax benefit of extending the Section 199A deduction. Coupled with the Net Investment Income Tax and state and local taxes, the proposal would impose marginal rates exceeding 40 percent on businesses that receive the full Section 199A deduction, or twice the rate paid by C corporations.
Is there broad support in Congress for tax hikes? Absolutely not. As chronicled by ATR in their latest release – there is simply no way a rate hike passes this Congress.
That said, we’re not taking any chances. S-Corp is reaching out to all lawmakers on Capitol Hill to remind them just how bad this idea is. Our members are already confronted with a shrinking economy, unprecedented tariffs, supply chain disruptions, and a pending fiscal cliff. Tossing a rate hike into the mix is economic malpractice that will cost jobs and slow the economy further.
Main Street businesses need to reach out to their representatives now, and Members of Congress need to make public their opposition to rate hikes.
Main Street (Still) Opposes Rate Hikes
The buzz on K Street is that the White House has resumed its push for Congress to raise the top tax rate as part of the upcoming tax package. If you’re confused by this (possible) development, so are we. Just a couple of weeks ago, the President signaled his opposition to rate hikes. Now they might be back on the table.
While that may be the case, it’s hard to envision a world in which a rate hike can pass either the House or the Senate this year. Most Republicans vigorously oppose such a move, as does Main Street. Our recent letter – signed by 90-plus national trade groups – outlines the challenges:
Pass-throughs comprise over 95 percent of all businesses and employ 62 percent of the nation’s workforce. Most pass-through business income is taxed at the top rates, so raising these rates would harm Main Street businesses engaged in just about every aspect of the economy. They are responsible for employing millions of Americans, driving investment, and supporting local economies nationwide.
The so-called “millionaire tax” in question – which actually kicks in at income around $620,000 – would saddle them with a tax hike that offsets about half the tax benefit of extending the Section 199A deduction. Coupled with the Net Investment Income Tax and state and local taxes, the proposal would impose marginal rates exceeding 40 percent on businesses that receive the full Section 199A deduction, or twice the rate paid by C corporations.
ATR president Grover Norquist understands the danger of higher rates. Here’s what he had to say:
What about increasing 199A to offset the tax hike? That won’t work either:
Certain industries are precluded from Section 199A, however, as is foreign-sourced income and Section 1231 gains. So-called “guardrails” tied to wages, capital investment, and taxable income reduce the value of the deduction for many more. Businesses ineligible for the full 199A deduction would face combined marginal rates above 50 percent. Rates that high are simply not sustainable.
For those businesses who don’t get the full 199A, this plan would simply be another tax hike as the rate hike would apply to ALL pass-through income over the threshold, while 199A only applies to some income.
Finally, a rate hike will not blunt criticism that the pending bill benefits the rich. No matter how high rates get, critics will always claim fairness demands that they be higher.
If this idea does gain traction in Congress, expect to see vigorous opposition from the Main Street community and many members of Congress. With the economy slowing and supply chains in jeopardy, Main Street needs tax relief and certainty right now, not more tax confusion.
Talking Taxes in a Truck Episode 42: Joe Lieber – Bullish on A Tax Deal
Joe Lieber is a founder and co-managing partner of Capitol Policy Partners, a veteran DC insider and a three-time TTT podcast guest! Joe kicks things off with an overview of the tariff debate and where he thinks things are headed, how the bond markets will react, and whether the levies can be rolled into the budget reconciliation package. We then turn to tax policy, where Joe gives his bull case for the massive tax and spending bill and how it will scale numerous hurdles to get to the President’s desk.
This episode of Talking Taxes in a Truck was recorded on April 28, 2025, and runs 38 minutes long.