Tax Reform

Small Business Tax Deduction Section 199A

Latest Tax Relief News for Small Business

For years, small businesses have counted tax issues among five of their top ten problems, according to NFIB’s Small Business Problems and Priorities survey. In 2017, the Tax Cuts and Jobs Act (TCJA) established the biggest tax overhaul in more than three decades, and it dramatically improved the landscape for many small businesses. NFIB’s survey of small business owners, The Tax Cuts and Jobs Act One Year Later: Part II, confirms that the overwhelming majority (82%) of small business owners believe this tax relief has had a positive effect on the economy. Unfortunately, some of this critical tax relief is scheduled to expire at the end of 2025.

Expiring Relief:

The following benefits are available to qualifying small businesses, but will sunset in 2025 if Congress doesn’t take action to make them permanent.

Small Business Deduction

The centerpiece of the pro-small business tax changes is Section 199A, the Small Business Deduction. This deduction is important because more than 90% of small businesses are organized as pass-throughs (S corporations, LLCs, sole proprietorships, or partnerships), not as C corporations.

Pass-through business owners (S corporations, LLCs, sole proprietorships, or partnerships) – regardless of the type of business they own – can claim up to a 20% tax deduction on their share of the business’s income up to $164,900 in tax year 2021, or $329,800 for those filing jointly. For small business owners whose taxable income exceeds the threshold, the deduction is subject to formulaic limitations. You can still benefit from the deduction if your business is employee intensive, or you make capital expenditures.

More than 81% of small business owners believe the Small Business Deduction is important to the health of their business. However, without additional congressional action, these important small business provisions are scheduled to expire after 2025 alongside other helpful tax benefits. Read more about the Small Business Deduction.

Lowered Individual Tax Rate

Individual tax rates lowered under the TCJA, something 45% of small business owners say is very important, and another 39% say is somewhat important to them.

Standard Tax Deduction

The TCJA roughly doubled the standard tax deduction to simplify filing taxes for Americans. For tax year 2021, the standard deduction is $12,550, or $25,100 if you’re filing jointly.

Estate Tax

The TCJA increased the estate tax exemption to $11.7 million for single filers and $23.4 million for joint filers for tax year 2021. This protects more small business owners from tax preparation expenses and issues created when business assets are passed on to children or other family members. A majority (69.7%) of small business owners see this increased exemption as very important or somewhat important.

Talk to your financial advisor about how likely your business is to be affected by the estate tax so you can be prepared.

NFIB leads a coalition of stakeholders fighting to Repeal the Death Tax, learn more here.

Expensing Equipment

Small business owners were already able to immediately deduct some of the costs of equipment purchased for use in their business. The TCJA expanded what equipment was eligible to deduct under Section 179. The maximum deduction in tax year 2021 is $2,620,000. Unlike other tax relief, 179 is permanent.

Eligible assets that depreciate over time are now eligible for “bonus expensing” where instead of expensing a fraction of the price per year of use, you can expense the entire purchase at once. The maximum bonus expensing limit is $1,050,000. Bonus expensing phases out in 2024.

Family and Medical Leave Tax Credit

The TCJA provides eligible employers who offer paid family and medical leave to their employees a tax credit for tax years 2018 and 2019. The Consolidated Appropriations Act of 2021 (CAA) extends this helpful credit through 2025. Additional information from the IRS is available here, although at the time of this writing, the IRS webpage has yet to be updated to reflect the new CAA extension.

Permanent Gains from TCJA:

The following benefits are available to qualifying small businesses and are not set to expire.

Corporate Tax Rate

Prior to the TCJA, the C corporation had a graduated tax rate. The TCJA flattened the rates to one rate, 21%.

New Pro-Small Business COVID-19 Recovery Tax Provisions

Several new tax benefits have been added for small businesses, as a part of the federal response to the COVID-19 pandemic. These benefits include:

  • Extended paid leave credit: The Family First Coronavirus Relief Act (FFCRA) permits employers to provide up to 80 hours of paid sick leave and up to 12 weeks of paid family leave to those affected by COVID-19. Employers can offset the costs of paid sick and family leave against payroll taxes.
  • Extended family leave and sick leave credit: Many business owners choose to provide employees the flexibility to take time off to care for themselves and their family. Small business owners have the opportunity to take care of themselves as well by receiving a tax credit for providing paid leave to their employees.
  • Employee Retention Tax Credit (ERTC): The ERTC program has been extended through June 30, 2021, offers a more generous tax credit, and eliminates a previous restriction for those with a Paycheck Protection Program (PPP) loan.
See If You Benefit From the Small Business Deduction

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Tax Relief Infographic

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Have questions about Section 199A?
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Get the Facts!

Our infographic below details how the 20 percent deduction means big savings for small business.

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199A Infographic

Tax Relief Continues to Help Small Business Thrive!

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Tax Relief Infographic

Top 5
Tax Cut Wins

Small Business Deduction:
20% deduction of qualified business income

Individual Tax Rates:
Reduces individual rates and expands income thresholds

Corporate Taxation:
Corporate tax rate reduced to 21% and corporate alternative minimum tax repealed

Section 179 Expensing:
Raised from $500,000 to $1 million per year

Obamacare Individual Mandate:Penalty for noncompliance repealed Jan 1, 2019

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