This April could be the last time small start-ups like mine enjoy the tax breaks of the Tax Cuts and Jobs Act (TCJA).
Starting something new is always scary. I remember the fear I felt launching my literary magazine at the end of 2024. As I stood in line for hours at city hall waiting to file my “Doing Business As” forms, I knew it might take a while for the business to become profitable, but I was grateful that in the meantime, I could write off some of my expenses (including the paperwork filing process to get started) on my taxes. Unless Congress extends TCJA, it will be harder for people like me to get their companies off the ground.
Enacted in 2017 during President Trump’s first term, the TCJA is set to expire at the end of 2025. While most people are worried about the increases they could face on their personal taxes, these fears are compounded for people like me who own business structures which are taxed at the individual level. The TCJA expiration would result in a tax environment that recognizes the value of corporations, but forgets the little guy.
The TCJA cut the tax rate for C-corporations from 35% to 21%. Economists recognize that corporate taxes are some of the most harmful to the growth of the economy, and that reducing them leads to more opportunity, more investment, and more jobs. Luckily, this lower corporate tax rate isn’t at risk of expiring. However, there are other valuable business types that get a similar tax benefit under the TCJA that would expire at the end of this year: LLCs and sole proprietorships.
LLCs are an increasingly common structure that small businesses have, tripling in frequency across the US over the past decade, making up the highest increase for incorporations in 2021. Under the TCJA, these “pass through” businesses, which are taxed at the level of the individual who owns and operates them, are able to deduct 20% of qualified income on their business expenses through a 199A deduction. This provision was intended to mimic the benefits that corporations receive at the small business level, recognizing their importance in the economy. Without this, only C-corporations can enjoy a lowered tax rate, leaving small unincorporated businesses behind.
There have been some concerns about the structure of the 199a tax deduction. The interaction this deduction plays with the progressive structure of individual income tax rates can lower the average tax rate by more than 20 percent on qualified business income for some people. Because of this, there’s concern that it incentivizes pass through business structures over incorporation. While there may be some merit to this argument, I would argue that the story is more complicated. In an age when there are more and more ways to start businesses online, especially for people who do not come from a business background or are the first in their families to attempt such a feat, a pass through structure can be less intimidating and pose fewer hurdles and fees.
Small businesses account for most new jobs in the U.S., but are more financially susceptible to economic changes. To continue supporting them, it’s important that their taxes don’t suddenly increase. Concerns about the impacts of the 199a deduction structure might warrant an adjustment, but certainly don’t warrant removal.
Letting the TCJA provisions expire would create a tax code that favors large, well-resourced companies and penalizes entrepreneurs based on their choice of legal structure. A flatter, fairer tax code should ensure that all businesses see the benefits of their hard work and entrepreneurship recognized by the government — not fewer.
Congress should renew the Tax Cuts and Jobs Act without totally eliminating the 199a tax deduction. Revisions to it should be made keeping in mind the small business owners who are doing their best to make a positive contribution to their communities online or in-person. They should continue to receive recognition similar to that received by large corporations in the tax environment.
