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FreedomWorks is proud to announce that our bill of the month for December 2019 is the Small Business Prosperity Act of 2019, H.R. 4947, introduced by Rep. Andy Biggs (R-Ariz.). The Small Business Prosperity Act would amend the tax code to make permanent the tax benefits pass-through businesses under the Tax Cuts and Jobs Act of 2017.
Rep. Biggs has long been a champion for lower taxes and greater economic freedom, especially when it comes to main street. The Small Business Prosperity Act is the latest example of his commitment to supporting local economies.
Signed by President Donald Trump in December 2017, the Tax Cuts and Jobs Act (TCJA) provided much-needed tax relief to individuals and small businesses through lower tax rates and a nearly doubled standard deduction. The statutory corporate tax rate was substantially lowered to 21 percent from 35 percent, making America more internationally competitive. Many business owners, though, file their business taxes on their personal income taxes. These are known as pass-through businesses.
The Tax Cuts and Jobs Act treated pass-through businesses differently to provide some parity with corporations. Two options were provided for qualified businesses with $157,500 for individuals and $315,000 for joint filers. The first was a 50 percent deduction for W2 wage income. The other option was a 25 percent deduction plus 2.5 percent of tangible property subject to depreciation. Whichever option provided the greater sum was the one that would be used as the deduction. The catch was that service trades or businesses were excluded from the deduction.
The inclusion of the provision was important. As the Tax Foundation notes, pass-through business tax filings far outnumber traditional corporation tax filings and have a higher net income. Put simply, pass-through businesses are the engine of the American economy, and these business owners were in need of tax relief.
Unfortunately, the individual income tax provisions of the Tax Cuts and Jobs Act, including the pass-through business deduction, are set to expire at the end of 2025 unless Congress passes legislation to make these provisions permanent.
The Small Business Prosperity Act has three distinct sections that each address a specific issue faced by small businesses. First, the bill would permanently lower the maximum tax rate for small businesses to 21 percent by increasing the deduction to 43 percent through December 2025 -- and 47 percent after beginning January 2026 -- and eliminating the limitation on the deduction for wages paid. It also expands the deduction to include service trades and businesses.
As Rep. Biggs notes in his initial press release, this merely extends “the same low rate that major multinational corporations have been benefiting from since 2018,” to smaller, local businesses as well. Second, it grants small business owners full flexibility to alter the existing structure of their business free from any tax penalties.
For example, a limited liability corporation (LLC) could switch to an S-corporation without any penalty. Third, the bill would eliminate the estate tax -- more accurately called the “death tax” -- which has regularly required the families of entrepreneurs to relinquish much of what their parents had built upon their passing.
One of the most important considerations for small businesses is the consistency of regulation. When the government changes the way it deals with businesses, those businesses incur costs to change their operations to fit the new rules. The same is true of taxation. When businesses -- especially small businesses that generally lack the resources to pivot quickly when regulatory changes are made -- are unsure of their legal obligations, it places great stress on those organizations.
The Small Business Prosperity Act would be a boon to small, local businesses across the country by providing them with the regulatory certainty that has been lacking as the expiration of the TCJA approaches.
We appreciate the hard work of Rep. Biggs and hope that other members of both chambers of Congress will see the massive benefits to pass-through businesses, including many small businesses, provided by the Small Business Prosperity Act.