The National Federation of Independent Business (NFIB), the nation’s leading small business advocacy organization, recently released two reports examining the 20% Small Business Tax Deduction, which was included in the 2017 Tax Cuts and Jobs Act, but is scheduled to expire at the end of next year. The reports find that if Congress fails to make the 20% Small Business Deduction permanent, small employers and the broader economy would face significant harm.
“These studies underscore just how crucial the 20% Small Business Deduction is to our Main Street employers,” NFIB State Director Chad Heinrich said. “Small businesses are the foundation of our national and local economy. The 20% Small Business Deduction has made it easier for small, and family-owned businesses here in Arizona to raise wages, purchase new equipment, and expand their operations. In this challenging economic environment, Congress must stop the massive tax hike on small businesses and pass the Main Street Tax Certainty Act.”
The 20% Small Business Deduction, introduced in the 2017 tax law, aims to create a fairer competitive environment for small businesses compared to larger corporations. This deduction has helped small business owners navigate the economic difficulties of recent years, but it is scheduled to end in 2025. The Main Street Tax Certainty Act seeks to make the deduction permanent, preventing a significant tax increase for many small businesses across the U.S.
The Ernst & Young macroeconomic analysis, released in conjunction with NFIB, measured the impact on small businesses of permanently extending the 20% Small Business Deduction. The analysis concluded that small businesses would flourish by making the deduction permanent, creating 1.2 million new jobs each year for the first ten years and 2.4 million annually every year thereafter. It would also result in a $750 billion GDP increase in the small business sector over the first ten years, and a $150 billion increase annually after that.
Without an extension, those benefits to small businesses and the broader economy would be lost.
“By allowing small business owners to keep more of their hard-earned money, the 20% Small Business Deduction empowers middle class small business owners to grow their businesses, hire employees and raise wages, and give back to their communities,” NFIB President Brad Close said. “If the deduction is allowed to expire at the end of next year, millions of small businesses will face a massive tax hike. It is crucial that Congress and the Administration take a strong stand for local small businesses and make the Small Business Deduction permanent.”
For Arizona, the analysis estimates that making the deduction permanent would create 26,000 new jobs each year for the first ten years, and 49,000 annually every year thereafter.
The analysis also found that 33 million small pass-through businesses employ more than 68 million workers in the United States. Of those 33 million small pass-throughs, 25.9 million claimed the deduction in 2021.
Small businesses are often considered “pass-throughs” because the revenues pass through to the owner’s individual tax return and are taxed under the individual portion of the tax code. By contrast, corporations pay their taxes under the corporate tax code.