The United States’ Pass-Through Deduction Is Essential For Metals Firms

At the end of 2025, the U.S. tax code’s Section 199A pass-through deduction will expire. This provision, created as part of the 2017 tax reform bill, has helped thousands of small and medium-sized manufacturers and industrial metals firms invest in their businesses. The National Association of Manufacturers (NAM) has released a tax explainer regarding the pass-through deduction, breaking down what it is, what it does, and why its preservation is vital to manufacturing in the United States.

The defining characteristic of a pass-through entity is that its business profits get “passed through” to the company owners, who then pay taxes on the business’s income on their personal tax returns. The vast majority of businesses in the United States, about 96 percent, are organized as pass-throughs, including S-corporations, partnerships, LLCs, and sole proprietorships.

In the manufacturing and industrial metals industries, pass-throughs are typically small, family-owned businesses, and this provision is a critical one for them. Specifically, the Section 199A pass-through deduction allows pass-through firms to deduct up to 20 percent of their qualified business income, decreasing their effective tax rate.

Combined with a lower individual income tax rate that also was included in the 2017 reform and reduced the top individual rate from 39.6 percent to 37 percent, the pass-through deduction has freed up significant capital for smaller companies to reinvest in their businesses.

How does NAM know this? The year after the deduction was enacted, 2018, was the best year for manufacturing job creation in 21 years and the best year for wage growth in 15 years. Both the pass-through deduction and the lower individual income tax rates are set to expire at the end of 2025.

Congress must make the pass-through deduction permanent and keep individual tax rates as low as possible. Interested in telling members of the U.S. House of Representatives and the U.S. Senate that they should preserve this deduction and the individual tax rate cuts? Use this link from NAM to do so.