Earlier this week the National Federation of Independent Business (NFIB) warned Congress of the detrimental effects small businesses would face if the Section 199A tax deduction is taken away at the end of 2025.

According to an August study prepared by EY on behalf of the S-Corp Association, pass-through businesses — which include sole proprietorships, partnerships, and S corporations — are generally not subject to entity-level income tax. Instead, the entity’s income, deductions, credits, and losses are passed through to the individual tax returns of the business owners, where they are taxed at the individual’s income tax rate. The top individual income tax rate is currently 37%, the study says.

Section 199A of the Internal Revenue Code provides a 20% small business deduction for pass-through income, subject to limitations.

The deduction of qualified business income is used by about 9 out of 10 Main Street businesses nationwide, according to NFIB. NFIB President Brad Close wrote in an op-ed for the Wall Street Journal that the Main Street Tax Certainty Act would ensure small businesses can grow and thrive.

“It’s the biggest tax cut for small businesses in history, helping level the playing field against large corporations,” Close wrote. “Its savings have helped small businesses create jobs, raise wages, and grow at a crucial time for the U.S. economy. Small businesses don’t need a cycle of uncertainty every few years, worrying if Congress will or won’t protect their relief. They need the confidence to continue investing, expanding, and improving their communities.

“The best way to give them that confidence is to make the small business deduction permanent. There’s already a bipartisan bill to make it happen: the Main Street Tax Certainty Act. Congress should pass it immediately.”

The EY study also found the deduction supports 2.6 million jobs and $325 billion of the GDP.

The number of tax returns claiming the Section 199A deduction grew from 18.7 million in 2018 to 29.5 million in 2021 — an increase of over 38%, or nearly 9% per year on average, according to the study. The study also states that the average Section 199A deduction was nearly $8,000 in 2021 and remained relatively stable after 2018.

S-Corp noted and agreed with comments made by Liam Donovan, of the Associated Builders and Contractors, during an interview on Fox Business.

“If you think about how businesses pay taxes, 9 out of 10 businesses in the United States actually pay through the individual side of the code. They employ 62% of Americans, so when Kamala Harris says she will raise taxes on people making more than $400,000, she is talking about raising taxes on Main Street — an average 20% increase in taxes on small businesses, family-owned businesses, and Main Street Businesses.

“It’s not just in the construction industry… think about anything downtown and on Main Street that isn’t a big box retail store. They are independent businesses paying at the individual rate. That is what is at stake when you’re thinking about going to the polls in November.”

In a news release, S-Corp mentions a video by Michelle Gallagher, an S-Corp advisor and principal accounting firm Gallagher, Flintoff & Klein, about outcomes businesses could face if 199A expires. She says 80-90% of businesses in America would be impacted.

“What it allowed businesses to do over the last eight years is to incentivize employers to invest back into their employees and grow their business by employing more people and buying more equipment — capital investment,” Gallagher said. “We have a number of studies that we are sharing with the Congressional Budget Office that show it worked.

“If you look at employment and capital investment, the business owners did go out and do what they were supposed to with [Section 199A]. So that’s a key selling point for keeping that portion of the Act in place and making it a permanent provision.”

Last year, 14 U.S. senators supported the Main Street Tax Certainty Act, introduced by Sen. Steve Daines (R-MT). It was read twice and referred to the Committee on Finance. Lloyd Smucker (R-PA-11) introduced the companion bill in the House which was referred to committee and failed to progress further.

Daines reintroduced the bill during the current legislative session.

Images

Featured image credit: Creativeye99/iStock

Graphs provided in EY study and by S-Corp Association