Preparing for the Section 199A Expiration

The Section 199A deduction, also known as the Qualified Business Income (QBI) deduction, was established by the Tax Cuts and Jobs Act of 2017. It permits eligible taxpayers to subtract up to 20% of their qualified business income from their taxable income. This provision is scheduled to expire for tax years starting after December 31, 2025, making financial planning for business owners and the self-employed necessary.

Understanding the Section 199A Deduction

Section 199A benefits businesses that operate as pass-through entities, where income “passes through” to the owners to be reported on their personal tax returns. Common pass-through businesses include sole proprietorships, partnerships, S corporations, and certain trusts and estates. The deduction is designed to lower the effective tax rate on this business income.

The deduction can be restricted based on the taxpayer’s total taxable income. For those with income above certain thresholds, the deduction may be limited by the amount of W-2 wages paid by the business or the unadjusted basis of qualified property it holds.

The rules are different for Specified Service Trades or Businesses (SSTBs), which are businesses in fields like health, law, accounting, and consulting. For SSTB owners, the deduction is phased out completely once their taxable income exceeds a higher statutory threshold.

Financial Impact of the Expiration

The expiration of Section 199A will translate to a higher federal income tax liability for many business owners. Without the 20% deduction, their total taxable income will be greater, increasing their overall tax bill. The loss of this deduction removes a benefit intended to align the tax burden of pass-through entities more closely with the reduced corporate tax rate.

For example, a business owner with $150,000 in qualified business income in 2025 could reduce their taxable income by $30,000. In a 24% marginal tax bracket, this deduction saves them approximately $7,200 in federal income tax for that year.

In 2026, if the deduction has expired, that same $150,000 in business income becomes fully taxable at their individual rate. This results in a direct increase in tax liability, reducing the cash flow available for business reinvestment or personal savings.

Tax Planning Strategies Before Expiration

One primary strategy is accelerating income into 2024 and 2025. The goal is to recognize as much revenue as possible during years when the 20% deduction is still available to lower the effective tax rate on that income. Business owners can manage billing cycles to ensure invoices are paid before December 31st, rather than letting payments slip into the following year.

This could also involve offering modest discounts for early payment to incentivize clients to settle accounts before year-end. Shifting income that might otherwise be received in early 2026 into the 2025 tax year allows one final opportunity to apply the deduction.

An inverse strategy involves deferring business expenses. Since deductions become more valuable when tax rates are higher, postponing non-essential expenditures until 2026 or later can be advantageous. Without Section 199A, an owner’s effective tax rate will rise, so each dollar of expense deduction in 2026 will yield greater tax savings.

For example, a business owner might delay a significant equipment purchase or office renovation from late 2025 to early 2026. Discretionary spending on marketing or professional development could also be postponed. Avoid pre-paying 2026 expenses in 2025, as this reduces taxable income in a year when the 199A deduction is still available.

Post-Expiration Business and Tax Considerations

The absence of Section 199A necessitates re-evaluating the choice of business entity. The deduction made pass-through structures like S corporations and LLCs tax-efficient. Without it, business owners may need to analyze if converting to a C corporation is a more favorable structure.

In a pass-through structure, profits are taxed once at the owner’s individual rates, which will be effectively higher without the QBI deduction. A C corporation pays a flat corporate income tax on its profits. When profits are distributed to shareholders as dividends, they are taxed again at the shareholder’s dividend tax rate, creating double taxation.

Deciding whether to restructure involves weighing the C corporation’s flat tax rate against the owner’s post-2025 individual rate. Factors to consider include the owner’s personal tax situation, the likelihood that business profits will be reinvested rather than distributed, and long-term growth plans. This analysis is complex and depends on individual circumstances.

The Legislative Outlook

Congress has the power to act before the end of 2025 to extend the Section 199A deduction, modify its terms, or make it permanent. Business advocacy groups are actively lobbying for an extension, highlighting its importance for small and mid-sized enterprises.

The provision’s future is tied to political and economic considerations, with no guaranteed outcome. Lawmakers could allow it to expire, extend it for a short period, or overhaul it as part of a larger tax package, creating uncertainty for long-term planning.

Despite the possibility of congressional action, business owners should plan based on the law as it is currently written. This means assuming the deduction will expire at the end of 2025. While staying informed about legislative developments is advised, strategic decisions should be rooted in existing statutory deadlines.