Policy and Legal

Through the NAM’s recently launched 2025 tax campaign, Manufacturing Wins, manufacturers are calling on Congress to prevent several devastating tax increases from taking effect at the end of next year.

One of those scheduled increases is the expiration of the Section 199A pass-through deduction—a critical incentive, created by tax reform in 2017, designed to help thousands of small and medium-sized manufacturers invest in their businesses.

The NAM recently released a tax explainer on the pass-through deduction, breaking down what it is, what it does and why its preservation is vital to manufacturing in the U.S.  Here are the highlights.

Pass-through defined: 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 America—96%—are organized as pass-throughs, including S-corporations, partnerships, LLCs and sole proprietorships.
• In manufacturing, pass-throughs are typically small, family-owned firms.

What it’s done for manufacturers: The Section 199A pass-through deduction allows pass-through manufacturers to deduct up to 20% of their qualified business income, decreasing their effective tax rate.

• Combined with a lower individual income tax rate included in the 2017 reform (which reduced the top individual rate from 39.6% to 37%), the pass-through deduction has freed up significant capital for smaller manufacturers to reinvest in their businesses.
• For example, 2018 was the best year for manufacturing job creation in 21 years and the best year for wage growth in 15 years.

What’s in jeopardy: Both the pass-through deduction and the lower individual income tax rates are set to expire at the end of 2025—and they’re certain to hit small and medium-sized manufacturers hard.

•  In a recent NAM survey, 93% of pass-through manufacturers said their ability to grow, create jobs and invest in their companies will be stymied if the expirations are allowed to happen.

What should be done: Congress must make the pass-through deduction permanent and keep individual tax rates as low as possible.

The last word: “Small and medium-sized pass-throughs are the backbone of the manufacturing supply chain,” said NAM Vice President of Domestic Policy Charles Crain. “Congress must act before the end of 2025 to preserve the pass-through deduction and prevent devastating tax increases on small businesses throughout the manufacturing sector.”