Sen. Ron Wyden wants to overhaul the tax break for pass-through businesses

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Robert Frank joins ‘The Exchange’ to discuss Sen. Ron Wyden’s plan to remove pass through exemptions from the tax code and eliminate the qualified business deduction for taxpayers making $500,000 or more a year. For access to live and exclusive video from CNBC subscribe to CNBC PRO: https://cnb.cx/2NGeIvi

Senate Finance Committee Chairman Ron Wyden, D-Ore., on Tuesday released a bill to overhaul a controversial deduction for certain businesses, which was part of Republicans 2017 sweeping tax legislation.

Currently, the so-called qualified business income deduction, also known as 199A, allows certain businesses, such as sole proprietors, partnerships and S-corporations, to write off up to 20% of net income.

The bill would phase out the tax break for households making more than $400,000 per year, sticking with President Joe Biden’s campaign pledge, Wyden told reporters on a call.

At the same time, the proposal also expands eligibility for the write-off by removing “extraordinarily arbitrary restrictions” on which industries qualify, he said.

In 2021, those making less than $164,900 or married couples filing together who earn under $329,800 may qualify for the full 20% deduction.

However, households earning above those thresholds may only claim part of the deduction and some types of businesses lose eligibility altogether.

For example, so-called service trades or businesses — which includes heath, law, financial services and more — don’t qualify above certain income levels.

Wyden’s phaseout begins above $400,000, eliminating the deduction completely at $500,000.

“There’s an opportunity here to pick up significant revenue while at the same time not raising taxes on Main Street small businesses,” Wyden said.

The proposal arrives as Democrats continue to iron out how to pay for priorities, such as education, health insurance, childcare, paid leave, green energy and more.

President Joe Biden is open to new ideas on how to raise taxes on the wealthy, as long as it doesn’t affect those earning less than $400,000, according to a White House official.

Who benefits from the deduction

Although U.S. pass-through businesses include small and large companies, Wyden pointed out how the tax break may disproportionately benefit wealthy Americans.

“Half of the monetary benefit goes to millionaires and because the benefit is so skewed towards the top, many Main Street small business owners actually were excluded,” he said.

Higher-income households receive a greater share of the pass-through business tax break than the middle-class, a report from the Center on Budget and Policy Priorities uncovered.

Moreover, 61% of the benefits may go to the top 1% of families by 2024, according to a Joint Committee on Taxation report.

Although the bill has support from some small business groups, the proposal may receive pushback from others, as well as Republican lawmakers.

“Sen. Wyden’s proposal to limit the small business deduction and raise taxes on small businesses is the wrong plan at the wrong time,” said Kevin Kuhlman, Vice President of Federal Government Relations at the Nashville-based National Federation of Independent Businesses.

Reducing the qualified business income deduction would directly hurt small businesses’ ability to hire, invest in their companies, increase compensation and threatens the fragile economic recovery, he said.

The current deduction will expire after 2025 without an extension from Congress.

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