Section 199a: Job Creator or Tax Giveaway?

The “qualified business income” deduction was added as section 199A to the Internal Revenue Code of 1986 (as amended) in December 2017 by the Tax Cuts and Jobs Act [Pub. L. No. 115-97, 131 Stat. 2054, 11011 (2017)]. Subject to a number of limitations, the section 199A deduction is generally equal to twenty percent of a taxpayer’s business income derived from partnerships, S corporations and sole proprietorships. The authors survey the legislative history for section 199A, which is extremely slim, and identify the most coherent policy rationale to be encouragement of job creation. One of the limitations is the disallowance of the deduction to taxpayers engaged in certain service businesses as profits from such businesses are seen as the functional equivalent of wages. However, this limitation does not apply to taxpayers with taxable income below certain thresholds. The authors believe this exception undermines the policy basis for the deduction in that it swallows the general rule due to the sheer number of taxpayers under the threshold. The authors make various recommendations to Congress for legislative changes to section 199A that would better serve the job creation purpose and prevent tax avoidance strategies. These recommendations would also rectify inconsistent treatment of partners, S corporation shareholders, sole proprietors and wage earners. The chief recommendation is that the statute be revised to rely exclusively on a limitation to the amount of the deduction based on the total wages the business pays, which is currently a limitation riddled with exceptions and alternatives.