Small businesses may be endangered by corporate tax reform


A research organization associated with American University in Washington DC, the Kogod Tax Center, says that efforts to reform the way corporations are taxed may have the unintended effect of raising taxes on small businesses – particularly those that are not organized as a full-fledged corporation. Many small broadcast companies would fall into the group.

Kogod’s David J. Kautter explains “…that the majority of US small businesses are structured as unincorporated ‘flow-through entities’—their business income is channeled directly to individual owners and is therefore subject only to individual tax rates, not corporate tax rates.

Kautter continued, “Most corporate tax reform proposals rely on eliminating range of ‘tax expenditures’—deductions, preferences, and credits that benefit all types of businesses. By reducing these tax expenditures, policymakers can increase the amount of business income subject to tax and then lower tax rates for corporations without adding to the deficit. Under most proposals, small, unincorporated businesses would suffer losing access to many tax deductions, preferences, and credits.”

“The effect could be chilling to small business growth and innovation,” said Kautter. “If we eliminate business deductions for all businesses, including those that are not corporations, but only reduce corporate tax rates, we could hurt a lot of smaller businesses on Main Street in the process.”

He suggested this is a poor time to suppress the job-generating capabilities of small businesses.

As an alternative, he suggests eliminating “business deductions, credits, and preferences” and charge one rate that applies to all businesses. In addition to being fair to small businesses, it would be relatively simple to administer.