Kustoff Bill Would Boost Section 199A Deduction to 23%, Expand QBI Eligibility

Key Takeaways

• QBI deduction rises from 20% to 23% for eligible pass‑throughs
• Service‑trade businesses no longer face phase‑out at the income threshold
• New “limitation phase‑in” adds 75% of excess taxable income
• Qualified BDC interest dividends become deductible, mirroring REIT treatment
• Inflation base updated to 2025; changes effective after 2026 year‑end

Pulse Analysis

Section 199A has become a cornerstone of tax policy for the United States’ pass‑through entities, allowing owners of sole proprietorships, partnerships, S corporations and certain trusts to deduct up to 20% of qualified business income. Since its inception in the 2017 Tax Cuts and Jobs Act, the deduction has spurred growth by lowering effective tax rates for small and mid‑size firms. However, the original framework includes complex wage‑and‑property limitations that disproportionately affect high‑earning service‑trade businesses such as law, accounting, and consulting firms, prompting calls for reform.

The Kustoff‑sponsored Small Business Tax Cut Act seeks to address those pain points by lifting the deduction rate to 23% and overhauling the limitation mechanics. Taxpayers below the income threshold retain the full deduction, while those above face a new "limitation phase‑in" that adds 75% of the excess taxable income, effectively cushioning the impact on service‑trade businesses that were previously disqualified. Additionally, the bill expands the deduction to qualified BDC interest dividends, placing them on equal footing with qualified REIT dividends and broadening the pool of deductible investment income for small‑business investors.

If enacted, the proposal could deliver immediate cash‑flow benefits to millions of entrepreneurs, encouraging reinvestment and hiring. Yet the Treasury estimates a notable revenue shortfall, raising questions about fiscal sustainability and the bill’s political viability in a tight budget environment. Tax advisors will need to reassess client strategies, particularly around income timing, wage structuring, and BDC investments, to maximize the new deduction while monitoring potential legislative adjustments. The act illustrates the ongoing tension between tax relief for growth‑oriented businesses and the broader goal of maintaining a balanced federal budget.