Policy Agenda: Tax Policy
Small Business Majority has created a comprehensive national and state policy agenda to ensure entrepreneurship is at the center of a thriving and inclusive economy. Tax policy is one of our seven topics of focus.
For too long, our nation's tax system has benefited the wealthiest Americans and large multinational corporations at the expense of small business owners, their employees and independent entrepreneurs. Indeed, our polling found 7 in 10 small business owners believe their business is harmed when big corporations use loopholes to avoid taxes, and 85% feel the tax code unfairly benefits large corporations over small businesses.
That's why we're concerned by the long-term impact of the 2017 Tax Cuts and Jobs Act. The law increases the deficit by $1.9 trillion, while dramatically lowering the rates for large corporations and the very wealthy with very little tax benefit for Main Street small business owners. The drastic reduction in corporate tax rates does not benefit most small businesses, as only 5% of them pay taxes at the corporate level. Moreover, the pass-through tax cuts are structured in a way that benefits those at the top far more than average business owners, with the majority of benefits going to the largest 2.6% of business entities.
If policymakers are serious about wanting to level the playing field for small businesses and drive our economy from the bottom up, they need to implement policies that will help all entrepreneurs, rather than giving tax breaks to those who need it least. This must include the following:
Address, simplify and correct provisions in the Tax Cuts and Jobs Act while considering proactive tax policies that would boost Main Street small businesses. The 2017 Tax Cuts and Jobs Act was a missed opportunity to encourage entrepreneurship and reduce red tape for our nation's small business owners. That said, we must continue to advocate for concrete policy solutions that will better serve our nation's entrepreneurs. This includes the following recommendations:
- Raise revenue while repositioning income tax benefits toward Main Street small businesses. Specifically, we recommend replacing the 2017 tax bill's pass-through component with a provision allowing small businesses to deduct their first $25,000 in business income, whether or not they file their tax returns as a pass-through entity or as a C-Corporation. This approach will provide income tax benefits to the vast majority of small enterprises, allowing them to generate enough savings to hire new employees, invest back into their businesses and make operational improvements.
- Raise revenue by closing inefficient corporate loopholes that put small businesses at a competitive disadvantage and add to the deficit. The savings would more than pay for the pass-through tax recommendation above. Loopholes include:
- International tax policies that allow large multinational corporations to pay tax on money earned abroad at half the tax rate for domestic business profits-an option not available to most small businesses.
- Carried interest, which benefits hedge fund managers by allowing them to pay taxes on ordinary income at special lower capital gains rates.
- Accelerated depreciation that reduces revenues primarily to benefit large businesses. Small business that are able to deduct up to $1 million on capital expenditures via Section 179 of the tax code do not benefit from the far greater accelerated depreciation used by large corporations.
- Ensure any additional changes to the corporate and personal tax codes made as part of technical fixes to the Tax Cuts and Jobs Act have a significant, direct benefit to small businesses and the self-employed.
- Monitor the effects of the tax cuts to ensure wealthy individuals are not abusing the law's new deductions for pass-through entities.
- Ensure parity between online and brick-and-mortar businesses with a reasonable and fair Internet sales tax solution. In 2018, the U.S. Supreme Court ruled in favor of tax parity, saying that states can require firms to collect online sales tax purchases even if a business has no physical presence in the state. Although this should help level the playing field between brick-and-mortar businesses and their larger online retail competitors, large online retailers must enact systems to ensure this collection will not be burdensome on the small retailers that operate on their sites.
- Enact the Protecting Taxpayers Act, which would streamline tax reporting for small businesses. Some of this bill's small business provisions include the following:
- Create a safe harbor for employer-only tip audits and clarify reporting requirements for tip income.
- Realign the quarterly reporting of estimated tax payments for small businesses.
- Release federal tax liens of businesses in the event of economic hardship.
- Allow retirement plan administrators to self-correct inadvertent plan violations.
- Align form 1099 reporting thresholds and streamline income reporting for independent workers.
- Identify and fix tax issues unique to micro-enterprises and freelancers, such as burdensome quarterly tax filings for freelance employees. These quarterly filing requirements, mandatory for any freelancer who will owe more than $1,000 annually to the IRS, are onerous and leave independent workers vulnerable to costly fees. Reforms should be considered that would require some types of companies to withhold on behalf of independent contractors.
- Establish a standard business expense deduction for independent workers.
Create small business opportunities through tax credits and incentives. Future changes to the tax code must help Main Street small businesses compete more effectively with large corporations. Recommendations include the following:
- Make the New Markets Tax Credit permanent. This tax credit, which is set to expire at the end of 2019, has helped attract more than $60 billion in private sector funding to build businesses in economically-distressed communities across the United States.
- Ensure Opportunity Zones guidelines are designed to benefit Main Street small business owners rather than focusing on primarily incentivizing real estate development. This includes requiring reporting metrics that measure program success based on the number of jobs created, where those jobs are located, employee wages and the number of businesses created, particularly businesses formed by women or people of color.
- Increase federal tax deductions for entrepreneurs in their first year of business, like increasing limits for deducting start-up and organizational expenses from the current $10,000 to $20,000.
- Expand both federal and state Earned Income Tax Credit (EITC) programs to increase small business employees' incomes and allow self-employed entrepreneurs to buy into the programs. For example, California recently raised EITC income eligibility limits so that more workers living at or near poverty levels can receive the credit.
- Create more tax incentives for angel investors. More than half of states offer tax incentives for angel investors. Federal support for these efforts would encourage more local and state governments to consider such measures.
- Create a tax credit for investing in early-stage startups operating in a high-technology field during the pre-revenue stage, such as the Invest in Innovative Small Businesses Act introduced in 2017.
- Pass healthcare tax equity for the self-employed so that freelancers can deduct their healthcare expenses from their FICA tax obligations-just like other business entities.
- Extend renewable energy tax credits that can benefit small businesses. Businesses that operate facilities that produce electricity from wind and other renewable resources can choose either the Production Tax Credit or the Energy Investment Tax Credit. These credits are set to expire in 2019 and 2021 respectively.