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The Tax Cuts and Jobs Act, passed by Congress in 2017, permanently lowered the corporate income tax rate from 35% to 21%. In order to prevent pass-through entities, such as partnerships, sole proprietorships, and S corporations—which include the vast majority of small businesses—from being taxed more heavily than C corporations, Congress established a new 20% deduction for eligible business income. The Internal Revenue Code’s section 199A contains the definition of this deduction. On the other hand, the 20% deduction for pass-through enterprises is set to expire at the end of 2025, in contrast to the permanent cut for C corporations.
How the Deduction Ties to Employee Wages
With some restrictions, this 20% deduction functions as a rate decrease for pass-through businesses. A company owner’s advantage from the 20% deduction may be restricted based on the amount of wages paid to non-owner employees (W-2 earnings) if their income surpasses a specific threshold ($383,900 for joint filers and $191,950 for other taxpayers in 2024). Generally speaking, the owner(s) of the company can deduct a larger amount from their taxes the more W-2 salaries the business pays.
The Local Impact:
20% Pass-Through Deduction
In order to permanently establish the 20% pass-through deduction, the U.S. Chamber of Commerce encourages Congress to support the “Main Street Tax Certainty Act.”
Restricting the pass-through deduction to entrepreneurs earning less than $500,000 in total revenue would lead to a tax rise on one of the main employment providers in our country, which would have a negative impact on both the economy and the labor force.
Click the button below to review the pass-through deduction statistics by state.
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Watson M. McLeish, C. D. (2024, February 29). Ensuring tax parity for Main Street businesses. Ensuring Tax Parity for Main Street Businesses | U.S. Chamber of Commerce. https://www.uschamber.com/taxes/impact-of-the-20-percent-pass-through-deduction?state=