The Potential Impact of the Expiring Qualified Business Income Deduction on Small Businesses

The qualified business income deduction (QBI), a significant tax break introduced through the Tax Cuts and Jobs Act of 2017, is set to expire after 2025 unless Congress intervenes. This deduction, which can be as much as 20% of eligible revenue, has been pivotal for many small business owners and self-employed individuals. The potential expiration of this tax benefit has raised concerns among experts and business owners alike.

The QBI deduction was designed to provide tax relief to pass-through businesses, which include sole proprietors, partnerships, and S-corporations, as well as some trusts and estates. These businesses report income at the individual level, unlike corporations that file separate tax returns. The intention behind the QBI deduction was to align the tax rates of pass-through businesses more closely with those of corporations, which saw their top federal tax rate reduced from 35% to 21% permanently under the same legislation.

The importance of the QBI deduction is underscored by its widespread use. According to the IRS, there were approximately 25.9 million QBI claims in 2021, a significant increase from 18.7 million in 2018, the first year the deduction was available. This surge indicates how crucial the deduction has become for business owners seeking to lower their tax burdens.

Experts warn that the expiration of the QBI deduction could be highly disruptive. The loss of this tax break could lead to increased tax liabilities for millions of small business owners, potentially affecting their financial stability and growth prospects.

As the 2025 expiration date approaches, business owners and stakeholders are closely monitoring legislative developments. The hope is that Congress will recognize the importance of this tax benefit and take action to extend it, thereby providing continued support to the millions of small businesses that rely on it.

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