Efforts in Congress to streamline the U.S. tax code could take a hefty toll on small businesses, a new study suggests.
Members of Congress are gearing up to work on U.S. tax reform measures, which will likely involve eliminating certain tax breaks and subsidies while reducing overall tax rates. Advocates of tax reform, such as Michigan Republican Rep. Dave Camp and Montana Democrat Max Baucus, say reform measures—though not determined yet—will make the tax system easier to navigate for businesses large and small. Small-business owners will benefit from the reforms, they claim, because individual tax rates—which more than 90 percent of business owners pay because they are sole proprietors or “pass-through” entities—could be reduced as low as 25 percent, according to The Wall Street Journal.
However, a new study by the Small Business Administration’s Office of Advocacy suggests that cutting certain business tax breaks (or tax expenditures, as they’re more formally called) could cost certain small businesses greatly. Among the tax breaks that may be targeted for cuts: domestic production deductions, retirement plan contribution deductions, health insurance and long-term care employer-contribution deductions and accelerated depreciation deductions.
For example, the study finds that nearly 93 percent of the $5.6 billion tax expenditures claimed for health insurance and long-term care premium deductions for the self-employed in fiscal-year 2013 came from small businesses. Section 179 expensing rules, contributions to defined-benefit (Keogh) retirement plans and domestic production activities are also heavily claimed by small businesses.
The study finds that only about one-quarter of the most common business tax breaks—or about $40 billion in total tax expenditures—are taken by small businesses. However, certain deductions are predominantly used by small companies.
Though the study does not indicate which tax breaks would likely be most targeted for cuts under U.S. tax reform, the authors point out that eliminating the tax breaks that small businesses use the most could “cause unintended economic disruption."
According to Reuters, it’s unlikely that agreement on U.S. tax reform would be reached before the November 2014 mid-term elections.
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