The 20% small business deduction (also known as the Qualified Business Income (QBI) Deduction under Section 199A) has been a major tax break for entrepreneurs and small business owners since its introduction in the 2017 Tax Cuts and Jobs Act (TCJA). This provision allows eligible business owners to deduct up to 20% of their qualified business income, reducing their taxable income and, ultimately, their tax bill.

However, unless Congress acts to extend it, this deduction is set to expire at the end of 2025—a potential tax shake-up that could impact small businesses across the country. If your business currently benefits from this deduction, now is the time to start planning for its possible phase-out and explore strategies to mitigate its impact on your bottom line.

What Happens If Section 199A Expires?

If the 20% QBI deduction disappears, pass-through businesses—including sole proprietorships, partnerships, LLCs, and S corporations—will lose a major tax-saving advantage. Here’s what that means in practical terms:

• Higher Taxable Income – Without the deduction, a business owner reporting $200,000 in qualified income would no longer be able to deduct $40,000 (20%), increasing their taxable income significantly.
• Increased Tax Burden – The deduction effectively lowers the tax rate on pass-through income. Without it, business owners may find themselves pushed into a higher tax bracket.
• Cash Flow and Growth Constraints – With higher taxes, businesses could have less available cash for reinvestment, hiring, or expansion.

Since this deduction primarily benefits small and mid-sized businesses, its expiration would disproportionately impact entrepreneurs who rely on it to keep more of their earnings.

How to Prepare Now

While the future of Section 199A remains uncertain, proactive planning can help your business navigate potential changes smoothly. Here are some key strategies to consider:

1. Accelerate Income Before 2026

If the deduction does expire, it may make sense to accelerate taxable income into 2025 while the 20% deduction is still available. You can do this by:

• Invoicing clients sooner to recognize income earlier.
• Selling appreciated assets before 2026 to benefit from the deduction on capital gains.
• Revising revenue strategies to front-load earnings into tax years with lower rates.

However, this approach depends on your specific financial situation—accelerating income could push you into a higher tax bracket, so consult with a tax professional before making a move.

2. Maximize Retirement Contributions

If tax rates rise post-2025, reducing taxable income through retirement savings will become even more valuable. Consider:

• Maxing out 401(k) or SEP IRA contributions to lower your taxable income.
• Exploring Roth conversions if you expect higher taxes in the future.
• Setting up a defined benefit plan if you’re a high-earning business owner looking for additional tax sheltering options.

These steps can help offset any tax increases from the loss of the QBI deduction.

3. Consider Business Entity Restructuring

With the potential expiration of Section 199A, some businesses may want to explore entity restructuring. Here are a few options:

• C-Corporation Conversion – While corporate tax rates remain at 21%, shifting from an LLC or S-Corp to a C-Corp might be beneficial in some cases. However, double taxation remains a consideration.
• S-Corp Election – If you’re currently a sole proprietor, electing S-Corp status could allow you to pay yourself a reasonable salary while minimizing self-employment taxes.

Each business is unique, so evaluating the long-term tax implications of restructuring with a professional is crucial.

4. Leverage Tax Credits and Other Deductions

If the QBI deduction disappears, maximizing other tax benefits will be even more important. Some areas to explore include:

• R&D Tax Credits – If your business invests in innovation, you may qualify for research and development tax credits.
• Section 179 Expensing – Take advantage of this deduction for equipment and property purchases.
• Hiring Credits – Programs like the Work Opportunity Tax Credit (WOTC) can help offset hiring costs.

By identifying alternative deductions and credits, businesses can offset some of the tax increases from losing the 20% QBI deduction.

5. Stay Informed and Advocate for Extension

Given the potential impact on small businesses, many industry groups and business organizations are pushing for an extension of Section 199A. While Congress could still renew or modify the deduction, small business owners should stay informed and advocate for policies that support their financial well-being.

Consider:

• Joining small business advocacy groups to stay up to date on legislative changes.
• Speaking with your accountant or tax advisor regularly to adjust strategies as laws evolve.
• Following legislative updates to understand how policymakers are addressing small business taxation.

Don’t Wait to Plan

The potential expiration of the 20% Small Business Deduction is one of the biggest tax changes on the horizon for small and midsize business owners. While Congress may still extend or modify it, businesses should not wait until the last minute to prepare.

Key takeaways:

• Consider accelerating income into 2025 to take advantage of the deduction while it lasts.
• Maximize retirement contributions to lower taxable income in future years.
• Explore entity restructuring to optimize tax treatment.
• Identify and utilize other tax deductions and credits.
• Stay informed and advocate for tax policies that benefit small businesses.

At The Holtz Group, we specialize in helping business owners navigate complex tax landscapes. Whether you need help adjusting your tax strategy or exploring alternative deductions, contact our team to help you prepare for whatever comes next.