While critics of the small-business tax deduction claim that the TCJA was a tax cut exclusively for ‘millionaires and billionaires,’ the facts tell a different story.
While critics of the small-business tax deduction claim that the TCJA was a tax cut exclusively for ‘millionaires and billionaires,’ the facts tell a different story.
A bout 15 years ago, Stephanie Camarillo took a chance and purchased Molly Maid, a residential-cleaning franchise in Boise, Idaho. Stephanie now is responsible for 33 employees, and her franchise has been voted the city’s best cleaning service. As a small-business owner, Stephanie has invested in her employees, providing them with the resources to pay off debt, save for college and retirement, and take on additional responsibility. When she was able to claim a small-business tax deduction a few years ago, Stephanie used the tax savings to give a promotion and raise to Jasmine, one of her top employees, a single mom working as a housekeeper while finishing up her GED at night. Thanks to the additional savings, Molly Maid now also offers paid holidays to employees, along with expanded health-care benefits for employees and their family members, including children.
Across the country, in Shady Spring, W. Va., Kyle Lindsey was finishing up his service in the Army, planning for civilian life. In early 2024, he and his friend opened Bob’s American Store and Café, where almost everything sold is made in America. Kyle points to the small-business tax deduction from Republicans’ 2017 tax reform as a primary reason for the café’s existence, from helping them purchase goods from farms and other small businesses to allowing them to hire additional employees. Within its first year, Bob’s American Store and Café hired its third employee and plans to grow its team to five by the end of 2024.
Small-business owners across the country have similar stories about the benefits from the TCJA small-business tax deduction. The owner of a pool-installation business in Missouri was able to begin covering 100 percent of his eight employees’ health-care costs and offering health-savings accounts (HSAs). A family rental company in Ohio raised wages and hired more seasonal workers for the busy season. A third‑generation manufacturing company bought more factory space, upgraded equipment, and doubled — then tripled — workers’ annual bonuses.
Many small-business owners were unaware that the small-business deduction they received was enacted by Republicans’ in the 2017 Tax Cuts and Jobs Act (TCJA), which provided a 20 percent deduction for the income that is “passed through” from the business to the owners who then report and pay the tax on that business income. Over 60 percent of Americans are employed by pass-through businesses, whose owners pay tax on those business profits personally.
These owners’ stories stand in stark contrast to politicians’ claims that the TCJA was a tax cut only for the wealthy and big corporations. In fact, the law enabled small businesses across the country to keep up with their larger competitors. Although “business” in American politics seems to have become synonymous with big corporations, the Small Business Administration calculated that in 2024, there were over 33 million small businesses in operation, making up over 99 percent of all U.S. businesses.
To give small businesses a fighting chance to compete, the 2017 tax overhaul paired a lower corporate-tax rate with two key elements to help small-business owners — lower individual rates across the board and the 20 percent pass-through deduction.
These two tax cuts worked together. After 2017, pass-through-business owners paid a lower rate on their income and were able to deduct 20 percent of qualified business income from their earnings, lowering the effective top individual-income-tax rate on business income from 37 to 29.6 percent. When polled, over 65 percent of small-business owners reported that the TCJA positively affected their personal-tax liability. This was a welcome benefit to many small-business owners who invested much of their net worth in their small business.
But the changes to the rates and pass-through deduction did not just benefit the businesses’ owners. Able to keep more of their earnings, many small-business owners invested these profits back into their communities, fast-tracking expansions, buying new equipment, and hiring more employees. Top among the industries building those communities, according to the nonpartisan Joint Committee on Taxation, were retail, manufacturing, construction, and real estate.
After enactment of the TCJA, business investment increased by even more than government scorekeepers originally predicted. Owners put the funds to use: In one survey of business owners who took the small-business tax deduction, 25 percent reported that they spent the money they saved in taxes to raise employee pay. The next-most-popular uses for the savings were company growth and expansion and hiring additional employees. Other key metrics of growth — including new manufacturing orders, small-business expansion plans, and new business applications — also soared after the tax law was passed.
While critics of the small-business tax deduction claim that the TCJA was a tax cut exclusively for “millionaires and billionaires” — including the small-business tax deduction — the facts tell a different story. A recent Ernst & Young analysis found that in 2021, 25.9 million businesses claimed the small-business tax deduction, with approximately 93 percent of those businesses having an income level under $500,000 — including accountants, contractors, landscapers, tutors, or family doctors. According to the same study, these businesses support 2.6 million jobs, contribute $161 billion to employee compensation, and add $325 billion to the economy.
In surveys over the years, small-business owners have consistently reported that the top problems they face are related to taxes. These businesses have also taken a hit from soaring inflation, as higher prices make it harder to compete with big businesses who have the extra resources to absorb rising costs. When surveyed today, business owners cite a new fear: the expiration of TCJA’s individual rates and small-business deduction at the end of 2025.
According to the National Federation of Independent Businesses, over 69 percent of surveyed small-business owners who took the deduction report difficulty in making future business decisions with the expiration of these provisions looming. And as every business owner knows, uncertainty comes with a cost. This ambiguity means businesses face halting their plans for growth, capping wages, and pausing hires.
If these provisions expire, Americans face a multitrillion-dollar tax increase, and small-business owners will be hit with a double tax hike from the elimination of the pass-through deduction coupled with a higher individual tax rate. The businesses hit hardest are the ones just starting out, finding success, and beginning to scale up. Many owners also say they will be forced to raise prices, postpone or cancel capital investments, and cut back on hiring.
Although entrepreneurs will pay the increased tax bill directly, others will be hit indirectly with increased prices, higher unemployment, and reduced wages. This double hit would have a chilling effect on the economy, hurting not only small businesses and their employees but also the consumers who would lose out on new products and innovations. In contrast, a September 2024 report estimates that a permanent extension of the small-business tax deduction would create 1.2 million jobs annually over the first ten years, growing to 2.4 million in the long run.
Small businesses are the backbone of the American economy and require certainty about their ability to grow and compete. A more favorable tax code has enabled businesses to thrive and invest in their ideas, products, and people. Small-business owners have made it clear that preserving the pass-through deduction is critical for their business operations and, in some cases, their very survival. As Congress deliberates the upcoming expiration of certain tax provisions, it would do well to remember the stories of small businesses that, unencumbered by a larger tax bill, bought a new warehouse, hired an additional employee, or funded an employee’s health-savings account. They represent the innovative American spirit that our tax code must protect.