Small Business Tax Cuts: What’s Next for the 20% Deduction?
/The 2017 Tax Cuts and Jobs Act introduced a significant benefit for small businesses: the 20% deduction on qualified pass-through income under Section 199A. This deduction, set to expire at the end of 2025, has fueled small business growth, job creation, and economic expansion. Now, with discussions around permanently extending the deduction, small business owners and policymakers are weighing the long-term impact.
A recent study, commissioned by the National Federation of Independent Business (NFIB), highlights the potential economic benefits of making the deduction permanent. If extended, it could lead to over 1 million new jobs per year, sustained GDP growth, and increased financial certainty for millions of small business owners.
Why the 20% Deduction Matters
The Section 199A deduction allows pass-through businesses—such as sole proprietorships, partnerships, and S-corporations—to deduct 20% of their qualified business income before calculating taxable income. Given that small businesses employ nearly half of the U.S. workforce, extending this tax relief would have broad economic implications.
According to the study, making the deduction permanent would:
Create 1.2 million jobs annually for the next decade, growing to 2.4 million jobs per year in the long run.
Boost U.S. GDP by $75 billion per year over the next decade, increasing to $150 billion annually after that.
Encourage business investment by lowering the tax burden on reinvested earnings.
The Stakes for Small Businesses
The uncertainty surrounding the deduction’s expiration is a concern for business owners. If Congress does not act, pass-through businesses could see a sharp tax increase starting in 2026, reducing their ability to invest, hire, and expand.
Many small business owners have voiced concerns that losing the deduction would make it harder to provide employee raises, invest in technology, or afford new equipment. Without the 20% deduction, businesses may face higher tax burdens, limiting their ability to expand, retain employees, and remain competitive. Some entrepreneurs warn that the financial strain could even force them to downsize or close their doors entirely.
The Policy Debate
The debate over tax policy isn’t just about numbers, it’s about economic confidence. Proponents of extending the deduction argue that locking in tax relief for small businesses will sustain job growth, enhance productivity, and level the playing field with larger corporations that benefit from a permanent 21% corporate tax rate.
Opponents, however, express concerns about the fiscal impact, noting that tax cuts must be balanced with spending reductions or alternative revenue sources. If the deduction is extended, policymakers will need to determine how to offset any potential budgetary shortfall.
What Comes Next?
The Ways and Means Committee and policymakers are currently discussing how to handle the looming tax sunset. With millions of small businesses and employees at stake, the decision will have far-reaching consequences for the economy.
For entrepreneurs looking to plan ahead, Rapid Business Plans provides expert insights and financial strategies to help businesses navigate policy changes and maximize available tax benefits. Whether preparing for expansion or adapting to a shifting tax landscape, having a strategic business plan in place is essential.
Find out how to build a strategy that keeps your business strong in any tax environment.
