A popular small-business tax cut is set to expire. Its future is uncertain

By Andy Medici – Senior Reporter, The Playbook, The Business Journals

Trade groups are sounding the alarm on a tax cut used by millions of small businesses that's set to expire at the end of 2025. Right now, there is no clear plan to keep it.

The Section 199A deduction, passed as part of the Trump administration’s 2017 Tax Cuts and Jobs Act, allows pass-through businesses — including sole proprietorships, partnerships and S corporations — to deduct up to 20% of qualified income, with certain caveats and qualifications. Businesses with income under a certain amount, for example, are able to claim all of their income. 

Since passed in late 2017, millions of returns have claimed the deduction, growing from 18.7 million returns in 2018 to 25.9 million returns in 2021, according to IRS data. Ultimately, about 77% of those claiming the deduction have less than $200,000 in adjusted gross income.

A 2024 survey by the National Federation of Independent Business found 59% of small-business owners said eliminating the credit would have a negative impact on their business. About 61% said they would have to raise prices while 44% said they would have to postpone or cancel capital investments in their business. Thirty-six percent said they would postpone or cancel hiring additional employees.

“If the deduction is allowed to expire at the end of next year, millions of small businesses will face a massive tax hike," said NFIB President Brad Close in a news release. "It is crucial that Congress and the administration take a strong stand for local small businesses and make the Small Business Deduction permanent.”

Other business tax credits set to expire

A host of tax credits beyond the small-business deduction are set to expire. That's because the Tax Cuts and Jobs Act had automatic sunset dates for many of the cuts, as federal budgets often use a 10-year time horizon for calculating deficit impacts. 

The tax package also lowered the corporate income tax rate from 35% to 21%, doubled the standard deduction and added a new credit for employers that offer paid and family leave to their workers, which would also expire at the end of 2025. The IRS has a comprehensive rundown of the full scope of the tax changes.

But some of the tax cuts put into place during the Trump administration have already expired or are phasing out gradually.

Companies, for example, previously expensed research-and-development spending in the year it happened, but starting in 2022, they had to amortize those costs over five years. Experts said the change would hurt research efforts and put the United States at a competitive disadvantage.

Businesses also have started to see the limitation of business net-interest expense deductions. Those are now limited to 30% of earnings before interest and taxes, instead of 30% before interest, taxes, depreciation and amortization. 

At the end of 2022, so-called “bonus depreciation,” in which businesses could immediately deduct short-term investments in things like equipment and vehicles, started to phase out. Instead of deducting those expenses at once, businesses under the change are only able to deduct 80% at one time, with the remaining 20% over the course of several years, depending on the item. Every year, the amount businesses can deduct will reduce by 20%.

The U.S. Chamber of Commerce and hundreds of local chambers of commerce are pushing to keep the total package of cuts in place.

“While the impact of a massive tax increase on individual Americans is clear, it is critical for policymakers to understand that the expiration of many pro-growth business tax reforms from the 2017 Tax Cuts and Jobs Act (TCJA) also will dramatically increase costs for families and customers, harm Main Street businesses, reduce take-home pay for workers, and result in the loss of innovation and American jobs,” said Neil Bradley, executive vice president and chief policy officer at the U.S. Chamber of Commerce, in a news release.

Will Congress support tax-cut extension?

The total cost in revenue to the federal government from 2025 to 2034 to keep those cuts is about $4 trillion, according to an analysis by the Tax Foundation.

On its own, the pass-through deduction would cost about $700 billion over the same 10 years. That means Congressional negotiations between Democrats and Republicans are often far more limited in scope. 

The House of Representatives passed a much smaller $78 billion of tax credits earlier this year, paid in large part by ending the Employee Retention Credit early and cracking down on bad actors who took advantage of the credit. The legislation didn’t include the 20% small-business deduction but did call for a temporary extension of an expanded child-tax credit, credits for businesses for research and development, and boosts to business deductions for depreciation. That legislation ultimately died in the Senate.

There is precedent for compromise around tax policy. Democrats and Republicans crafted legislation in 2013 to make some tax cuts passed under President George W. Bush permanent for those making less than a certain amount per year. Several tax compromises were also made during the Covid-19 pandemic.

A survey by the Small Business Majority in August found small-business owners are open to an overhaul of the tax system, with 82% saying they believe it favors large corporations, and roughly 75% saying the wealthy and large corporations don’t pay their fair share in taxes.

That survey also found about 64% of small businesses take advantage of the 20% pass-through deduction known as 199A, and 53% support a proposal to be able to deduct the first $25,000 in net business income each year. While most of the businesses that take the deduction are smaller, the dollar amount claimed by larger businesses means 70% of the current deduction benefit flows to just 4.5% of businesses, the Small Business Majority said.

“The Tax Cuts and Jobs Act was a failed promise of prosperity for small businesses,” Small Business Majority Founder & CEO John Arensmeyer said in a news release. “Fortunately, we have an opportunity for a do-over. This time around, Congress must take into account the needs of the overwhelming majority of small businesses, many of which are struggling just to stay open and would greatly benefit from common-sense tax reform that delivers more bottom-up benefits."