Is the small business deduction here to stay?

At the end of 2025, the 20% Small Business Deduction (also known as the 199A pass-through deduction) is scheduled to expire, potentially leading to a significant tax increase for entrepreneurs and startups. Business advocates are now campaigning to ensure the deduction is extended. Currently, qualifying businesses—such as LLCs, partnerships, and S corporations—benefit from a 20% income tax deduction, a provision introduced to create parity with corporations, which have enjoyed a flat 21% corporate tax rate since 2017. Before the deduction's implementation, business income for owners was taxed at the same rates as wages.

US Capitol where lawmakers are considering new tax legislation.

Advocates remain optimistic that some provisions will be extended beyond 2025, with the Small Business Deduction being a top priority.

Without renewal, small-business owners anticipate significant consequences. According to a 2024 National Federation of Independent Business survey, 61% of owners said they would need to raise prices, while 44% would postpone or cancel planned capital investments. More than half of respondents noted that increased tax payments would negatively impact their businesses, with 31% describing the impact as severe. The loss of these savings could also hinder job creation, wage increases, and operational expansion.

If the Trump-era tax cuts are not extended, the effects could compound. Small-business owners would face higher business income taxes while also contending with increased individual tax rates. Key provisions, including the standard deduction, individual tax rates, and child tax credits, would revert to pre-2017 levels, cutting the standard deduction nearly in half.

One possible silver lining for entrepreneurs could come from the expiration of the $10,000 cap on state and local tax (SALT) deductions. If removed, small-business owners could once again deduct state taxes on their individual returns, partially offsetting the loss of the 199A deduction.

Renewing the tax cuts is a priority for Republicans, but challenges remain. House and Senate Republicans have pledged to reduce federal spending, making it difficult to fund the continuation or permanence of these deductions. The Treasury Department’s Office of Tax Analysis recently estimated that phasing out the Small Business Deduction could save $673 billion between 2026 and 2035. Meanwhile, fully extending the 2017 tax cuts would cost $4.2 trillion over the same period.

Some business owners have considered restructuring as C corporations to mitigate the impact of higher taxes, but such moves should not be taken lightly. For now, all we can do is wait and see. We will keep you updated.