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The temporary deduction applies to so-called pass-through businesses that report income at the individual level, such as sole proprietorships, partnerships, S corporations and some trusts and estates.
“We hope they'll be extended because if the tax cuts expire it will cause a lot of disruption for a lot of business owners,” said Dan Ryan, a tax partner at law firm Sullivan & Worcester.
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Lawmakers added the temporary QBI deduction to the Tax Cuts and Jobs Act to set tax rates for pass-through businesses similar to corporate tax rates.
However, although the QBI deduction will be eliminated after 2025, the law also lowered the top federal tax rate from 35% to 21% and permanently reduced corporate taxes.
According to the IRS, for tax year 2021, the most recent data available, there were about 25.9 million QBI claims, up from 18.7 million in 2018, when the tax cuts were first implemented.
“This is very important for a lot of private companies,” said Howard Gleckman, a senior fellow at the Urban-Brookings Tax Policy Center.
Garrett Watson, senior policy analyst and modeling manager at the Tax Foundation, said there are “very strong feelings” about whether to extend the QBI deduction as the 2025 tax cliff approaches.
Business advocacy groups have called for making the tax break permanent, arguing that the credit promotes growth, while some policy experts and lawmakers have cited the credit's high cost and complexity.
Watson said the QBI deduction would be “quite large” and estimated to cost more than $700 billion over 10 years, which could pose a challenge amid the debate over the federal budget deficit.
Other critics argue that the QBI deduction primarily benefits the wealthy because higher-income taxpayers are more likely to have pass-through income, but IRS data shows that millions of middle-income taxpayers also claim the deduction.
Watson said some Democrats are eager to end the tax cuts, but “that would be in direct contradiction to the president's pledge to cut taxes.”
White House national economic adviser Lael Brainard in June reaffirmed President Joe Biden's promise to extend Trump's tax cuts only for people making less than $400,000 a year.
