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Pass-thru Taxation could top To-Do List next Congress if other Taxes don’t Intrude

May 11, 2022

The taxation of pass-thru entities could receive a lot of attention in the next Congress if lawmakers can clear the current slate of tax issues before year’s end, according to sources close to the subject.

Lawmakers are currently embroiled in discussions over whether to reverse the amortization of R&D outlays and allow them to be expensed. They are also focused on returning the Section 163(j) interest deduction back to its pre-2022 form.

Both changes enjoy broad, bipartisan support, but there is a hiccup. A large group of lawmakers oppose extending business tax relief before expanding the Child Tax Credit for families. They have vowed to oppose any bill that includes business tax relief if assistance for families is also not included.

Their position leads to yet another problem.

A different group of lawmakers oppose expanding the Child Tax Credit because supplying additional funds to taxpayers could exacerbate inflation. Some of the lawmakers within this group are trying to add an R&D and interest deduction fix to a manufacturing bill that Congress could vote on in July.

If they fail to add these tax measures to the manufacturing bill, these lawmakers will focus on adding them to a year-end tax bill. However, lawmaker opposition to passing business tax relief without also approving aid to families will likely be an ongoing argument as the year ends, and could stop an R&D and interest deduction fix from becoming law by the holidays. 

If, If, If:

If lawmakers are unable to overcome their contrasting positions on taxes by year-end, passing a fix for R&D and the interest deduction will be tax-writers top priority next year, according to sources.

If lawmakers can reach an agreement on the current slate of tax issues, then the tax-writing committees are expected to look at the taxation of pass-thrus in the next Congress, which begins in January and runs through 2024.

If the tax committees focus on pass-thrus, a large piece of that focus will likely be extending the 20% deduction on qualified business income (Section 199A) beyond its current December 31, 2025, expiration date.  

The deduction can be applied to income from sole proprietorships, partnerships, and  S corporations. It is also available for some trusts and estates, according to the IRS. Lawmakers are expected to extend current law and not expand who can qualify for the deduction, according to sources.  

As previously stated, the current deduction does not expire for roughly 2.5 years, but discussions on extending it are already underway. Lawmakers in favor of renewing the pass-thru deduction know they will likely need time to garner support for extending the provision, which is costly.

Lawmakers are not expected to permanently extend the measure, but renew it for a few years.

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