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Tax policy is always significant for small business owners in an election year, and this year is no different. Given that many of the tax cuts for both individuals and businesses enacted by the Tax Cuts and Jobs Act (TCJA) are set to expire at the end of 2025, tax policy will likely be an early priority for the next administration.
Both former President Donald Trump and Vice President Kamala Harris have proposed tax policies that would impact small businesses, but their approaches differ markedly.
Donald Trump’s tax policy proposals
General approach: Trump’s approach to tax policy is based on lowering the corporate tax rate, reducing business regulation, and maintaining the pass-through entity tax deduction enacted by the TCJA. Most of his proposed measures favor large businesses and businesses that file as C corporations.
1. Reduction in corporate tax rates:
Trump's administration implemented a significant tax cut through the Tax Cuts and Jobs Act (TCJA) of 2017, which lowered the corporate tax rate from 35% to 21%. Although this rate primarily benefited larger corporations, businesses of all sizes operating as C corporations also enjoyed this reduced rate. Trump has advocated for maintaining or even further reducing this rate, which could continue to benefit businesses that file as C corporations by lowering their tax liabilities and potentially increasing their cash flow.
2. Pass-through entity tax deduction:
Trump has said he will maintain the pass-through entity tax deduction introduced by the TCJA. This provision allows small businesses structured as pass-through entities (such as S corporations, partnerships, and sole proprietorships) to deduct up to 20% of their qualified business income. This deduction aims to reduce the effective tax rate for small business owners, enabling them to retain more of their earnings for reinvestment or distribution.
3. Capital investment incentives:
Trump has also supported policies that encourage capital investment, such as accelerated depreciation schedules for business assets. These incentives allow businesses to recover the cost of investments more quickly, which can be beneficial for small businesses looking to upgrade equipment or expand operations. This measure can facilitate growth by lowering the upfront costs associated with capital expenditures.
4. Regulatory and tax code simplification:
The Trump administration focused on reducing regulatory burdens and simplifying the tax code. A simplified tax code can reduce compliance costs and administrative headaches, making it easier to navigate tax obligations and focus on core business activities. Efforts to streamline regulations and minimize bureaucratic red tape are generally seen as advantageous for small business owners.
However, Trump has not declared any specific measures that would support small businesses, and in his first administration many of the business tax cuts he created went to corporations.
5. Increased tariffs:
A core piece of Trump’s tax policy is increasing tariffs on foreign goods. Tariffs are taxes placed upon imported goods. While Trump has asserted that these tariffs are paid by foreign manufacturers, primarily China, the economic evidence has proven that it is actually American businesses and consumers who end up paying higher prices, not foreign companies.
Vice President Kamala Harris’s tax policy proposals
General overview: Harris’ tax policy is focused on raising taxes for large corporations, expanding the pass-through entity deduction for small businesses, and increasing tax credits for small businesses.
1. Establishment of a new $50,000 tax deduction for new small businesses:
Vice President Harris announced a plan to offer a massively expanded tax deduction for new startup businesses, increasing it from $5,000 to $50,000. The startup deduction is part of a larger plan to encourage entrepreneurship and support new small business owners.
2. Increase in corporate tax rates:
Harris supports raising the corporate tax rate to pre-TCJA levels, proposing a rate of 28% for large corporations. This increase would not significantly impact small businesses unless they file as C corporations. Higher corporate taxes could lead to increased prices or reduced competitiveness, which could have a positive effect on small businesses' market position and profitability.
3. Expansion of pass-through deduction:
Harris has proposed expanding the pass-through entity deduction for small businesses. Specifically, her plans involve increasing the 20% deduction limit for qualifying pass-through entities and providing more targeted relief for smaller enterprises. This expansion aims to provide greater support to small business owners and enhance their ability to reinvest in their businesses.
4. Support for small business financing:
While not directly tax-related, Harris has advocated for increased support for small business financing, including more access to affordable loans and grants. Her proposals include expanding programs like the Small Business Administration (SBA) loan guarantees and providing additional funding for community banks and credit unions that serve small businesses. This would increase small business owners’ access to capital.
5. Enhanced tax credits for small businesses:
Harris has also said she wants to expand tax credits for small businesses that invest in workforce development, sustainability, and technology. For instance, she supports tax credits for businesses that invest in employee training or green energy initiatives. The purported aim of these credits is to encourage small businesses to adopt practices that may lead to long-term benefits and competitive advantages.
Overall, Vice President Harris’s tax policies do offer greater and more direct benefits for small businesses.
How would both candidates’ policies affect the deficit?
While both candidates’ proposals are projected to increase the deficit, the amount of that increase is sharply different: according to Penn Wharton’s Budget Model, Vice President Harris’s proposals would increase the deficit by $1.2 trillion over the next 10 years, while former President Trump’s proposals would increase it by $5.8 trillion in the same time period.
Helpful resources for small businesses:
- The Qualified Business Income (QBI) Deduction: Do You Qualify and Should You Take it?
- 17 Big Tax Deductions for Small Businesses
- The Big List of Small Business Tax Credits
- The Best Small Business Loans of 2024
