Corporate Advantage of Section 199A Set To Expire

A SPECIAL REPORT by Tripp Scott's Tanya L. Bower, Marianna Seiler DeJager and Liza D. Robles

With the enactment of the Tax Cuts and Jobs Act (TCJA), significant changes were introduced in the U.S. tax landscape. One of these prominent changes was the reduction of the corporate tax rate from 35% to 21%. Furthermore, the TCJA introduced IRC Section 199A, which was designed to bring S Corps and other pass-through entities in line with the C Corporation tax rate. IRC Section 199A generally allows taxpayers, excluding C Corporations, to claim a deduction related to their qualified business income (QBI). QBI is typically derived from trade or business activities.

Under this provision, eligible taxpayers can obtain a 20% deduction on their QBI, effectively reducing their tax liability. This benefit primarily benefits entities such as partnerships, S Corporations, and LLCs. Many of our clients have benefitted from the 199A deduction. However, with the sun setting of the TCJA on December 31, 2025, Section 199A is set to expire, which means this tax advantage will end.

In contrast, the reduced corporate tax rate of 21% will not expire, prompting a choice of entity consideration for taxpayers. While it was advantageous to structure their businesses as partnerships, S Corporations, or LLCs for income tax purposes due to the benefits of Section 199A, the impending sunset of this provision might lead taxpayers to reconsider their entity choice.

Unless Congress acts and prevents the sunsetting of Section 199A, it may now be more advantageous for taxpayers to explore the possibility of setting up their business as a C Corporation for income tax purposes. The choice of entity structure should be carefully evaluated, taking into account the evolving tax landscape and the long-term financial goals of the business. The tax professionals at Tripp Scott, P.A. are closely following Congress and its actions in light of the sunsetting of the TCJA tax benefits. Please consult with one of your corporate attorneys at Tripp Scott, P.A. to discuss the choice of entity rules and whether you should consider modifying the tax treatment of your entity.