Will Section 199A Deduction Get Changed?

  • Agribusiness
  • 7/20/2021

Senator Ron Wyden has proposed changes to the Section 199A deduction. We review the major impacts.

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.

This blog contains general information and does not constitute the rendering of legal, accounting, investment, tax, or other professional services. Consult with your advisors regarding the applicability of this content to your specific circumstances.

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