Small Business Tax Cut Act
- Sponsor
- Rep. Kustoff, David [R-TN-8]
- Committees
- Ways and Means Committee (primary)
- Last action
- Apr 21, 2026
Bottom line
The bill aims to provide a larger tax cut for small businesses and certain investment companies by enhancing and expanding the Section 199A deduction, while also updating its inflation adjustments and modifying income limitations.
What it actually does
This bill amends the Internal Revenue Code of 1986 to increase the deduction for qualified business income (QBI) from 20 percent to 23 percent. It also modifies the income-based limitations for this deduction, clarifies the treatment of specified service trades or businesses, and expands eligibility to include certain interest dividends from qualified business development companies (BDCs). Additionally, the bill updates the inflation adjustment base year for QBI deduction thresholds.
Proponents argue
Proponents argue that this bill stimulates economic growth by reducing the tax burden on small businesses, allowing them to reinvest in their operations, create jobs, and increase wages. They would also emphasize that expanding the deduction to BDC interest dividends encourages investment in small and developing businesses, further bolstering the economy.
Opponents contend
Opponents might contend that increasing the QBI deduction disproportionately benefits wealthier business owners and could significantly reduce federal tax revenue, exacerbating the national debt. They might also argue that expanding the deduction to BDCs could create new tax loopholes or primarily benefit large investment firms rather than genuinely small businesses.
The bill is concise, allowing for a quick read, but its implications for the tax code require careful consideration beyond a superficial review.
Section 2(a)
Increase Qualified Business Income Deduction to 23%
This provision amends Section 199A of the Internal Revenue Code to increase the deduction for qualified business income (QBI) from 20 percent to 23 percent. This means eligible pass-through businesses, such as sole proprietorships, partnerships, and S corporations, will be able to deduct a larger portion of their business income from their taxable income, reducing their overall tax liability.
Supporters argue
Supporters argue that a higher QBI deduction provides significant tax relief to small businesses, fostering reinvestment, job creation, and economic expansion by allowing them to retain more of their earnings.
Critics contend
Critics might argue that this increase primarily benefits higher-income business owners and could lead to substantial revenue loss for the federal government without guaranteed broad economic benefits for all small businesses.
Tradeoffs
This provision balances the goal of stimulating small business growth and investment with concerns about federal revenue loss and potential distributional inequities in who benefits most from the tax cut.
Section 2(b)
Revise QBI Deduction Income Limitations and Phase-in
This section restructures how the QBI deduction's limitations, based on taxable income, are applied. It clarifies that taxpayers whose taxable income does not exceed a specified threshold amount are exempt from wage and unadjusted basis of qualified property (UBIA) limitations, and that specified service trades or businesses (SSTBs) are not excluded. For taxpayers whose income exceeds the threshold, a new 'limitation phase-in amount' is introduced, calculated as 75% of the excess taxable income over the threshold, which reduces the otherwise applicable deduction. It also removes a prior paragraph related to this phase-in.
Section 2(c)
Extend QBI Deduction to Qualified Business Development Company (BDC) Interest Dividends
This provision expands the types of income eligible for the QBI deduction to include 'qualified BDC interest dividends.' A qualified BDC interest dividend is defined as any dividend from an 'electing business development company' (a BDC that elects to be treated as a regulated investment company under Section 851) received during the taxable year, provided it is attributable to the BDC's net interest income from a qualified trade or business.
Section 2(d)
Update Inflation Adjustment Base Year for QBI Thresholds
This provision updates the base year for inflation adjustments to the QBI deduction's threshold amounts from 2018 to 2025. It also removes a specific instruction related to the 2017 calendar year for determining the inflation adjustment. This change means that future inflation adjustments to the income thresholds for the QBI deduction will be calculated using a more recent baseline, ensuring the thresholds remain current with economic conditions.
The amendments made by this Act, including the increased deduction rate, modified limitations, and expanded eligibility, shall apply to taxable years beginning after December 31, 2026.
Section 2(e)
Why it matters:This is standard legislative practice to place effective dates at the end of a section or bill, providing clear guidance on when the new law takes effect without interrupting the policy descriptions.
Case for: Provides clarity and sufficient lead time for taxpayers, tax preparers, and the Internal Revenue Service (IRS) to understand and prepare for the new tax rules before they become effective.
Case against: Delays the immediate benefits of the tax cuts for small businesses and investors by over a year, potentially reducing their near-term economic impact and pushing any economic stimulus further into the future.
Estimated impact: The delayed effective date means the primary fiscal impact of the bill, including both reduced tax revenue and any economic stimulus, will not be felt until fiscal year 2027 and subsequent years.