The Tax Cuts and Jobs Act (TCJA) and Small Business

By SBE Council at 24 September, 2024, 12:01 pm

By Karen Kerrigan –

The tax issue is getting a fair amount of attention out on the presidential campaign trail. A looming deadline is approaching where key provisions in the Tax Cuts and Jobs Act (TCJA) expire in 2025, and the two candidates have staked out different positions as to whether they favor extending these provisions or allowing them to expire. There’s a lot at stake for small businesses.

Vice President Kamala Harris supports allowing the TCJA to expire while former President Donald Trump favors an extension. Trump also favors cutting the corporate rate from 21% to 15%, and Harris is pushing an increase in the startup deduction from $5,000 to $50,000. Harris also supports an increase in the corporate and capital gains tax rates, as well as higher tax rates on “wealthy” individuals, and measures that would impact savings and investment.

As a reminder, if the TCJA expires, the list of affected provisions – that is, expiring provisions – include:

● 20% small business deduction (Sec 199A)

● Reduced individual rates (top rate, for example, was reduced from 39.6% to 37%)

● Increased threshold for individual AMT, increased standard deduction

● Increased estate tax exemption would return to $5.6 million single from its current $11.4 million, and $11.1 million for married couples from $22.8 million.

● Family tax relief – doubling of maximum child tax credit and increased eligibility

In addition, other tax measures important to small businesses have been phased out. These provisions, such as immediate R&D expensing, 100% bonus depreciation, and interest deductibility have been widely used by small businesses, which is why SBE Council supported the House-passed “Tax Relief for American Families and Workers Act of 2024.” Unfortunately, this tax package did not pass the Senate. This legislation also included an increase in immediate small business expensing.

Is TCJA Bad for Small Business?

Extra effort is being put into casting the TCJA as a package that significantly skews toward benefiting the rich and big business. For example, SBA Administrator Isabel Guzman repeated this claim at a recent House Small Business Committee oversight hearing in response to a question about whether the TCJA benefitted small businesses:

What I will say is that the tax cuts…that lean towards supporting the large with permanent tax cuts for large corporations and temporary tax cuts for small businesses, so that Tax Cuts and Jobs Act is not good for small businesses.

But there is one problem – the facts and data say otherwise. The TCJA has been very beneficial for entrepreneurs and small businesses.

According to our recent Small Business Checkup Survey (August 2024), 85% of small business owners report varying degrees of benefits from the TCJA.  With respect to the 20% small business deduction, it has been widely used by eligible small businesses – 49% of small business employers report that they have used the deduction and many report important benefits. As a reminder, not all small businesses are eligible to use the deduction.

In terms of how the 20% deduction has benefitted their businesses, entrepreneurs report that it helped their business survive and better navigate the COVID-19 shutdown pressures and high inflation, pay employees more and hire new employers, invest more in their business, and to operate competitively overall.

Small business owners report significant uncertainty about the expiring 20% deduction and note wide-ranging impacts if the TCJA were to expire. These include: limiting new hires, increased operational costs, increased borrowing, reduced investment, delayed expansion, downsizing employees and price increases. Only 16% say that not extending the TCJA will not impact their small business.

Yes, the TCJA is benefitting small businesses. Allowing it to expire will be burdensome for small businesses and harmful to local economies. In fact, a recent S-Corp Association study found that the positive impacts of the 20% deduction are compelling. As their EY analysis found, “Section 199A [the 20% small business deduction] supports 2.6 million jobs, $161 billion of employee compensation, and $325 billion of GDP.”

As a sidenote, and as pointed out in a recent analysis about the lower corporate rate, small businesses actually do benefit from the relief, as the dominant share of C-corps are small firms. As noted by SBE Council chief economist Ray Keating, in terms of C-corp employer and non-employer firms, 90.1% have fewer than 20 employees, 97.3% have fewer than 100 workers.

The TCJA has been a solid plus for small businesses. Allowing the TCJA to expire – and increasing taxes on the U.S. business ecosystem in general – is bad policy for small businesses and the overall vibrancy and competitiveness of the U.S. economy.

Karen Kerrigan is president & CEO of the Small Business & Entrepreneurship Council.