Why the Tax Code was Written to Benefit Business Owners
To begin, a couple of presidential quotes about small business can set the stage for a discussion of the value of tax breaks for business:
“To make our economy stronger and more competitive, America must reward, not punish, the efforts and dreams of entrepreneurs. Small business is the path of advancement, especially for women and minorities.”
– George W. Bush, State of the Union Speech, February 2, 2005.
“The entrepreneurial spirit burns brightly as the creativity and productivity of America’s small businesses make our Nation’s business community the envy of the world.”
– Bill Clinton, State of Small Business Report, May 5, 1998.
Impressive Small Business Statistics
Few would argue that the tax code is too complex, and some of the reasoning for that is the attempts by government to influence behavior. One behavior the government wants to encourage is the taking of risk in starting a business. There are many facts that support the importance of small business to the U.S. economy. These statistics come from Fundera.com:
Number of small businesses
There are approximately 30.2 small businesses in this country comprising over 99% of all businesses by count. This is according to the SBA Office of Advocacy, which defines a small business as a firm with fewer than 500 employees.
Number employed by small business
There are approximately 58.9 million people employed by small business in America. This comprises 47.5% of the entire U.S. workforce. These are tax paying employees, so it is clear that there is tax receipt leverage in giving tax breaks to help small business to create jobs.
6.04 million small businesses have employees, which means that 20% of all small businesses have at least one employee. Small businesses make up 99.7% of all firms with paid employees.
Number and percentage of new jobs from small business
At the end of the third quarter of 2016, there were 1.9 million new jobs created by small business in that quarter. New businesses account for nearly all new jobs created each year. New small businesses account for almost 20% of gross job creation.
These are impressive numbers, and they are why it has been the focus of Congress for generations to encourage small business startups and growth through tax advantages.
Congressional Research Service Report to Congress Titled Current Tax Law and Arguments for and Against Them
This is an exhaustive study of the economic value of small business balanced with the cost to the government for tax breaks given to business. In the report is this chart of the tax benefits for business and their cost to the government:
|Small Business Tax Preference||Federal Tax Code Section||Nature of the Benefit||Eligible Firms||Current Status||Revenue Cost in FY2018 Under Current Lawa ($ billions)|
|Limited Expensing Allowance||179||Allows firms to deduct as a current expense up to $1 million of their expenditures on qualified depreciable assets placed in service in 2018; begins to phase out when total amount exceeds $2.5 million||No size limit||Permanent||$9.9|
|Nonagricultural Cash-Basis Accounting||446||Allows eligible partnerships and C corporations (including certain farms) to use the cash method of accounting||C corporations and partnerships with average annual gross receipts of $25 million or less in the previous three tax years||Permanent||5.0|
|Full Exclusion for Gains from the Sale of Qualified Small Business Stock||1202||Allows noncorporate investors to exclude between 50% and 100% of any gains on the disposition of qualified small business stock held for five or more years||Stock must be issued by C corporations in a qualified business that have $50 million or less in gross assets when the stock is issued||Permanent||1.3|
|Tax Credit for Employee Health Insurance Costs||45R||Allows eligible small employers to take a nonrefundable tax credit for nonelective contributions that cover 50% or more of the cost of health plans for participating employees||Employers with 25 or fewer employees whose average annual compensation does not exceed $50,000||Permanent||0.6|
|Simplified Dollar-Value LIFO Accounting Method||474||Allows qualified small firms to use a simpler LIFO method in estimating the base-year value of their inventories||Business taxpayers with average annual gross receipts of $5 million or less in the three previous tax years||Permanent||0.2|
|Deduction and Amortization of Eligible Business Start-Up Expenses||195||Allows start-up businesses to deduct up to $5,000 of eligible start-up expenses in the year they begin to operate, and to amortize the remaining expenses over 180 months; the deduction phases out, dollar for dollar, when total qualified expenses exceed $50,000||Firms in their first year of business||Permanent||0.1|
|Tax Credit for Expenses Incurred in Improving the Accessibility of a Business for Disabled Individuals||44||Allows qualified small firms to claim a nonrefundable tax credit for qualified expenses they incur in making their facilities more accessible for disabled persons||Employers with gross receipts of $1 million or less in the previous tax year, or with 30 or fewer full-time employees during that year||Permanent||Less than $50 million|
|Ordinary Income Treatment of Losses on Sales of Certain Small Business Stock||1244||Allows taxpayers to deduct any loss from the sale, exchange, or worthlessness of qualified small business stock as an ordinary loss and not a capital loss||Individuals and partnerships||Permanent||NA|
|Treating Losses on the Sale of Small Business Investment Company (SBIC) Stock as Ordinary Losses||1242||Allows individual taxpayers who invest in SBICs to deduct from ordinary income all losses from the sale or exchange or worthlessness of SBIC stock||Any individual investing in an operating SBIC||Permanent||NA|
|Exemption from the Uniform Capitalization Rule||263A||Exempts qualified small firms from the requirement that firms acquiring real or tangible property for resale capitalize or include in the estimated value of their inventory the direct cost of the property included in it, as well as the indirect costs that can be allocated to the property||Business taxpayers with average annual gross receipts of $25 million or less in the three previous tax years||Permanent||NA|
|Use of Section 41 research tax credit against payroll tax||41(h) and 3111(f)||Allows qualified firms to claim a payroll tax credit of up to $250,000, using all or a portion of their unused research tax credit for the current tax year||Business taxpayers that have less than $5 million in gross receipts in the current tax year and had no gross receipts in a tax year preceding the previous five years||Permanent||NA|
|Tax Credit for Pension Plan Start-Up Expenses||45E||Allows qualified small firms to take a nonrefundable tax credit for a portion of the costs they incur in establishing new qualified pension plans for employees||Employers with fewer than 100 employees, each of whom received $5,000 or more in compensation in the previous calendar year, and with one or more highly paid employee participating in the plan||Permanent||NA|
|Exemption for Qualified Small Firms from the Limitation on the Deduction for Business Interest||Section 163(j)||Allows eligible small firms to deduct business interest without the limits set by P.L. 115-97.||C corporations and passthrough entities with $25 million or less in average annual gross receipts in the three previous tax years.||Permanent||NA|
The report does not present a conclusion other than there are questions as to whether the costs are worth the benefits of small business tax breaks. If there are the large numbers of them and their employees voting, it is likely that Congress will not be killing these breaks in any large-scale way.