The certified enterprise earnings deduction might expire after 2025

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Trillions of dollars worth of tax breaks will expire after 2025 unless Congress approves an extension. These include large tax deductions for millions of self-employed individuals and business owners.

The Tax Cuts and Jobs Act of 2017, enacted by former President Donald Trump, created the Qualified Business Income Deduction (QBI), which – subject to certain limitations – can amount to up to 20% of eligible sales.

The temporary deduction applies to so-called pass-through entities that report their income at the individual level, such as sole proprietors, partnerships and S-corporations, as well as some trusts and estates.

“There is hope that this will be extended because it will be very disruptive to many business owners,” said Dan Ryan, a tax partner at the law firm Sullivan and Worcester.

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Lawmakers included the temporary QBI deduction in the Tax Cuts and Jobs Act to create tax rates for pass-through businesses that are similar to tax rates for corporations.

While the QBI deduction expires after 2025, the legislation permanently reduced the corporate tax rate by reducing the top federal tax rate from 35% to 21%.

For the 2021 tax year, which is the most recent data available, there were about 25.9 million QBI claims, according to the IRS, compared to 18.7 million in 2018, the first year the tax break was available.

“This is something that is very important to many private companies,” says Howard Gleckman, senior fellow at the Urban-Brookings Tax Policy Center.

An extension would be “quite expensive”

Looking ahead to the 2025 tax cliff, there are “very strong opinions” about whether to extend the QBI deduction, says Garrett Watson, senior policy analyst and modeling manager at the Tax Foundation.

Business officials say the deduction promotes growth and are pushing for the tax break to be made permanent. However, some policy experts and politicians point to the high cost and complexity of the deduction.

The QBI deduction is “quite expensive,” with an estimated 10-year cost of more than $700 billion, Watson said, and could be challenging given the debate over the federal budget deficit.

Other critics say the QBI deduction primarily benefits the wealthy because they are more likely to have pass-through income. However, according to IRS data, there are also millions of middle-income taxpayers who claim the deduction.

Watson said some Democrats would like to see the tax cuts expire, “but that runs counter to the president's tax promises.”

White House national economic adviser Lael Brainard reiterated President Joe Biden's promise in June to extend Trump's tax cuts only to those earning less than $400,000.