Policy Issues

Pass-Through Business Income


Real estate generally is owned and operated through “pass-through” entities that allow income to pass through to individual owners rather than taxing the income at the entity level. In 2017, Congress reduced the corporate tax rate by 40% and created a new 20% deduction (section 199A) for pass-through business income to avoid putting businesses organized as partnerships, S corporations (S corps), and real estate investment trusts (REITs) at a competitive advantage relative to large C corporations (C corps).

Tax legislation proposed and considered in 2021 would significantly increase the combined tax rate on pass-through businesses. The version of the Build Back Better (BBB) Act that passed the House Ways and Means Committee in 2021 would have raised the top marginal income tax rate on many small and pass-through business owners from 29.6% today to 46.4%. While the proposed tax increases on pass-through businesses were reduced prior to passage by the full House, significant challenges remain in the Senate. For example, Senate Finance Committee Chairman Ron Wyden (D-OR) has proposed eliminating section 199A for pass-through business owners with more than $500,000 in combined income.

Largely at the insistence of Congressional Democratic moderates, particularly Sen. Kyrsten Sinema, the final tax reconciliation legislation enacted in August 2022 did not include any changes to the general tax rate on pass-through businesses or new restrictions on the 199A deduction.  

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Congress should continue to support small, closely-held, and entrepreneurial businesses that create jobs and spur growth by avoiding tax changes that discriminate against pass-through entities, such as partnerships and S corps.


  • Our pass-through regime is a competitive strength of the U.S. tax system. Most other developed countries are heavily reliant on inflexible corporate regimes that provide little ability for an entrepreneur to tailor the capital and ownership structure to meet the needs of the business.
  • Small and closely-held businesses are the principal drivers of job growth and entrepreneurial activity in the United States. Entity choice is a differentiator that contributes to our entrepreneurial culture.
  • Half of the country’s four million partnerships are real estate partnerships. Real estate investment, new construction and development, and rental businesses constitute a significant share of pass-through business activity. 
  • These partnerships include a wide variety of arrangements that range from two friends who purchase, improve, and lease a modest rental property to a large private real estate fund that raises capital from sophisticated institutional investors.
  • Similarly, listed REITs provide the opportunity for small investors to invest in large-scale, diversified real estate operations using the same single tax system available to partners and partnerships.
  • Pass-through entities such as partnerships, Limited Liability Corporations (LLCs), S corps, and REITs, are ideal for real estate investment because they give investors flexibility in how they structure the risks and rewards of the business. The benefits of pass-through taxation help compensate real estate owners for the additional risks and challenges associated with the ownership of large, capital-intensive, and relatively illiquid assets.
  • Any new tax legislation should avoid the unintended consequences and potential harm caused by the stacking of tax increases on pass-through entities which, when combined, would severely increase the tax burden on these job-creating businesses.
  • Congress should preserve the 20% deduction for pass-through income (section 199A). The availability of the deduction is tied to hiring workers and investing in capital equipment and property.

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