The end of this tax break could be ‘very disruptive’ to business owners, expert says — what to know

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

But while the QBI deduction will sunset after 2025, the legislation permanently reduced corporate taxes by dropping the top federal rate from 35% to 21%.

For tax year 2021, the most recent data available, there were roughly 25.9 million QBI claims, up from 18.7 million in 2018, the first year the tax break was available, according to the IRS.

“It’s something that is very important to a lot of privately held businesses,” said Howard Gleckman, senior fellow at the Urban-Brookings Tax Policy Center.

An extension would be ‘fairly pricey’

As the 2025 tax cliff approaches, there have been “very strong feelings” about whether to extend the QBI deduction, according to Garrett Watson, senior policy analyst and modeling manager at the Tax Foundation.

Business advocates say the deduction promotes growth and have pushed to make the tax break permanent. Meanwhile, some policy experts and lawmakers point to the high cost and the deduction’s complexity.

The QBI deduction is “fairly pricey,” with an estimated 10-year cost of more than $700 billion, Watson said. That could pose a challenge amid debate over the federal budget deficit.

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

Watson said some Democrats are eager to see the tax break expire, “but that runs right into the president’s tax pledge.”

White House National Economic Advisor Lael Brainard in June reaffirmed President Joe Biden’s promise to extend Trump’s tax breaks only for those making less than $400,000.