The small-business deduction is a big win for Main Street

OPINION:

On April 15 last year, America’s small businesses faced the possibility of a massive tax increase at year’s end. It would have stalled job creation, reduced business investment and impeded the growth of the small-business economy.

Now, thanks to the federal tax bill signed into law by President Trump over the summer, small-business owners have the permanent tax certainty and relief they need to expand their businesses this year and beyond.

Although new tax relief, such as removing taxes on tips and overtime income, received much of the attention, the provision making the 20% small-business tax deduction permanent is a significant achievement of the White House and Congress.

In a complex tax code, the small-business tax deduction stands out for being a simple, commonsense tax provision that directly benefits Main Street America. Making this crucial deduction permanent is a model for tax policy that fuels jobs and economic growth.

More than 90% of small businesses are “pass-through entities,” meaning that instead of paying the corporate income tax rate, the vast majority of small businesses’ income “passes through” their individual tax returns before those earnings can be reinvested in the business and its employees.

These earnings are taxed at the business owner’s individual tax rate, which is often higher than the corporate tax rate paid by many big businesses.

The idea behind creating the 20% small-business deduction was simple: It allows the smallest businesses to deduct some of their business earnings, bringing them closer to parity with their larger corporate competitors.

By leveling the playing field for small businesses and allowing them to keep more of their hard-earned money in the business, the small-business deduction did what it was intended to do. When the time came for the president and Congress to make this provision permanent, the millions of small businesses that benefited from the deduction made the decision clear.

The small-business deduction has proved to be effective. According to the IRS, 25.7 million tax returns claimed the deduction in 2022, the last year for which data is available. An EY analysis shows that more than half of those claiming the deduction earned less than $100,000.

The tax savings realized by these millions of businesses have allowed them to grow, hire, invest in their employees and businesses — and give back to their communities.

Those benefits will increase in size and significance now that the deduction has been made permanent. According to EY, a permanent extension of the small-business deduction will create 1.2 million new jobs per year and add $750 billion to gross domestic product growth in the small-business economy alone.

This is great news for job creation and economic growth across America. The American small-business economy is the third-largest in the world, after only the American and Chinese economies.

Communities across the country will benefit from this provision, as small-business owners create local jobs, purchase equipment and vehicles from other local businesses, and continue their support of vital community activities such as sports leagues, school activities and community events.

In surveys of small-business owners, taxes are consistently cited as a top concern. The combined costs of federal and state taxes squeeze margins and stymie economic growth, and tax complexity drains valuable time and resources from small businesses.

The permanent extension of the small-business deduction is a great example of pro-growth, pro-jobs tax policy that will help people and communities prosper.

Competitive, pro-growth tax policy is central to the health of the American economy. By making the small-business deduction permanent, Congress has made the tax code more accessible.

The threat of a tax hike this tax season has been replaced with long-term tax certainty for small businesses. This historic accomplishment by the White House and Congress deserves strong recognition and thanks from America’s small businesses.

• Brad Close is president of the National Federation of Independent Business.