no more tax write offs for small business owners

Pass-through Business Income Shares and Components in 2018 In other words, while a relatively small number of business owners would be affected, an outsized share of business activity (as measured by business income) would be affected by the proposed tax increases. While taxpayers making above $500,000 comprise roughly just 4 percent of returns that reported either business net income or net losses, they account for more than half of the resulting net income. More recent IRS data, for tax year 2018, further confirms that a significant share of pass-through business income would face higher marginal tax rates under Biden’s proposals. That such a small group of filers generates more than half of all pass-through income implies that taxes that target this group could impact the economy significantly. When we did this using data from the 2011 Internal Revenue Service (IRS) Public Use File, we found that the 6 percent of filers with pass-through net income with adjusted gross incomes above $400,000 were responsible for 52 percent of all pass-through income reported to the IRS.

In this sense, the analysis classifies as small businesses many filers at the lower part of the income distribution who may not operate what we think of as a traditional business that makes capital investments, employs workers, and generates significant income.Ī better way to assess the overall impact of the Biden tax increase on the economy would be to look at the share of pass-through income that would be impacted by it. Even though selling clothes is just a small portion of their total income, they report it on their tax return under Schedule C, and the Treasury analysis would capture them as an unaffected small business. Indeed, when we conducted a similar analysis we found that only 6 percent of filers with pass-through income would be affected.īut looking at “filers with pass-through income” likely understates the effect on small businesses, and therefore underestimates the effect on the economy more broadly.įor instance, imagine someone who earns a wage at a traditional job but also sells some clothes online. Although the White House news release does not link to the actual study, it appears that they simply calculate how many filers are above the income thresholds where President Biden’s taxes would apply.

The Treasury analysis specifically examines filers with pass-through income, or income that is reported through a sole proprietor, partnership, or S corp. To assess the economic effect of higher marginal tax rates, it matters how much income or investment will be affected-not how many taxpayers. The Biden administration recently cited an analysis from Treasury claiming that “the President’s agenda will protect 97 percent of small business owners from income tax rate increases.” However, the figure is misleading.

No more tax write offs for small business owners