Save the Qualified Business Tax Deduction
On “60 Minutes,” Kamala Harris said that as president, she would “invest in small businesses” and “strengthen America’s economy.” She said that “small businesses are part of the backbone of America’s economy,” but the vice president has yet to express support for continuing a tax provision whose expiration would damage that economic backbone.
After I opened my consulting firm in 2016, I discovered the many inequities for small businesses that are buried in the tax code. As a sole proprietor, I pay both the employee and employer share of payroll taxes. As a District of Columbia business owner, I pay a franchise tax with a flat rate of 8.25%. That means I pay more in taxes on my business income than if that income came to me as wages from an employer. I pay high health insurance premiums on the ObamaCare plans, and receive a smaller tax deduction for those premiums than people with employer-sponsored coverage do.
Congress recognized these inequities when it passed the Tax Cuts and Jobs Act in 2017, allowing certain pass-through entities to deduct 20% of their business income on their personal income taxes. (Pass-throughs are legal entities not subject to corporate income tax.) This provision—the qualified business income deduction—also reflects that owners of pass-through entities pay taxes through their individual income-tax returns at rates of up to 37%, rather than at the corporate tax rate of 21%.
In 2021 nearly 26 million households used the qualified business income deduction, according to the latest Internal Revenue Service data, covering returns filed in 2022. Most of them are middle class. Among households claiming the deduction, 20 million reported adjusted gross income below $200,000, claiming an average $2,811 write-off. An additional 4.3 million households using the deduction reported adjusted gross income between $200,000 and $500,000, claiming a deduction averaging $9,194.
Despite the many households claiming the qualified business income deduction and the substantial savings to small-business owners, Ms. Harris hasn’t publicly committed to renewing it when it expires at the end of 2025. If the deduction lapses, the entrepreneurs Ms. Harris said “invest in the middle class” would face tax increases of hundreds or thousands of dollars a year.
Some might think Ms. Harris’s proposal for a $50,000 small-business deduction will reduce or even eliminate the need for the qualified business income deduction. Far from it. It would apply only to startup costs, providing scant benefit to existing small businesses.
If Ms. Harris supports what she says is the backbone of the American economy, she should publicly pledge to extend the qualified business income deduction.
This post was originally published at The Wall Street Journal.