The AICPA recommended in an Aug. 24 letter to Senate tax-writing leaders eight ways to improve the deduction for qualified business income (QBI) under Sec. 199A. Five of the recommendations address proposed amendments to Sec. 199A that are contained in S. 2387, the Small Business Tax Fairness Act, sponsored by Sen. Ron Wyden, D-Ore., which was introduced in July.
In the letter to Wyden, who is the Senate Finance Committee's chair, and Sen. Mike Crapo, R-Idaho, the committee's ranking member, the AICPA stated that modifications to Sec. 199A, which allows certain noncorporate taxpayers to deduct the lesser of combined QBI or 20% of taxable income over net capital gain, should be fair, equitable, and simple, with minimal compliance costs and effective government administration. The letter was signed by Jan F. Lewis, CPA, chair of the AICPA Tax Executive Committee.
Eliminating the SSTB distinction
The AICPA supports the Small Business Tax Fairness Act's proposed removal of the current difference in treatment of specified service trades or businesses (SSTBs), which would allow all types of trades or businesses (other than performing services as an employee) to qualify for the deduction. The letter notes that professional services firms are important contributors to the economy and argues that the current law's denial of the QBI deduction to those that are SSTBs with taxable income over a certain amount is inequitable and reflects an outdated view of the current integrated global economic environment.
SSTBs are defined by Sec. 199A(d)(2) as trades or businesses involving the performance of services in a number of specified fields — including accounting — and types of activities, plus any trade or business whose principal asset is the reputation or skill of one or more of its employees or owners. Their QBI deduction is limited or eliminated by taxable income over a threshold amount, which the bill also would increase to $400,000.
Aggregating trades or businesses for QBI
Another of the bill's proposed amendments the AICPA supports is to Sec. 199A(c)(1), which currently requires computation of QBI with respect to "any qualified trade or business of the taxpayer," meaning that qualified items of income, gain, deduction, and loss are netted with respect to each trade or business separately (although an election to aggregate them, in limited circumstances, is available under Regs. Sec. 1.199A-4). The bill would substitute for the above phrase "all qualified trades or businesses of the taxpayer," which would aggregate them by default. This simplified approach would help alleviate the current compliance burden inherent in some taxpayers' required multiple applications of QBI components and limitations, the AICPA noted.
Retain the QBI deduction for estates and trusts
However, the AICPA shares concerns regarding some other provisions of the bill, such as one that would specifically deny the deduction to an estate or trust. While the bill's general intent is to limit the QBI deduction to individuals, the AICPA argues that excluding trusts and estates would be inequitable and an administrative burden for executors and trustees. If Congress is concerned that individuals would create multiple trusts to increase their benefit with respect to the proposed $400,000 threshold amount, trust rules already in place prevent that strategy, the letter points out.
Retain the QBI deduction for ESBTs
Another of the bill's changes would also eliminate the ability of an electing small business trust (ESBT) to claim the deduction. The AICPA asks that Congress retain the QBI deduction for all trusts, including for an ESBT.
Simplify treatment of rental activities
The bill does not currently address rentals and royalties, but the AICPA recommends that Sec. 199A(c)(3) be amended to include in qualified items of income, gain, deduction, and loss constituting QBI those items attributable to property held for the production of rents or royalties (within the meaning of Sec. 62(a)(4)) within the United States. This would simplify the treatment of rental activities, eliminating the need for the safe harbor in Rev. Proc. 2019-38, the letter suggested.
Simplify QBI losses
The AICPA recommends that a loss with respect to qualified trades or businesses of a taxpayer should not be required to be carried forward to a succeeding tax year to the extent the taxpayer incurs an overall loss from qualified trade or business income.
Remove the 'marriage penalty'
The AICPA does not support the bill's application of the same threshold amount for all taxpayers without distinction of filing statuses of single, married filing jointly, or head of household, nor the bill's specific elimination of the QBI deduction for married taxpayers filing separately. (The current threshold amount is double the single taxpayer amount for married taxpayers filing jointly.)
Deductions by self-employed taxpayers
Another recommendation independent of the bill is to provide that the deductible portion of self-employment tax, the deduction for self-employed health insurance, and the deduction for contributions to qualified retirement plans do not automatically reduce QBI.