It’s the Worst Possible Time to Consider Raising Taxes on Small Businesses

As inflation concerns soar, and with labor and supply shortages unlikely to let up anytime soon, small businesses are navigating challenging waters—with many facing even more difficulties now than at the height of pandemic shutdowns.

However, at a time when small businesses are facing massive challenges, recent legislative proposals have included provisions that would raise taxes on passthrough entities like S corporations, partnerships, and limited liability companies (LLCs). These types of businesses are all small businesses.

State of play: Inflation continues to climb at the fastest rate since November 1981, with prices increasing 9.1% on an annual basis in June.

According to the latest U.S. Chamber and MetLife Small Business Index, 88% of small business owners are concerned about the impact of inflation on their businesses, and supply chain disruptions remain a steady challenge.

The facts: To finance a new reconciliation spending plan, some in Congress recently proposed a new 3.8% tax on passthrough businesses, also known as the Small Business Surtax. This was wrongly characterized as closing a ‘loophole’ to help fund Medicare, and could have had a devastating impact at a time when Main Street can least afford it.

The U.S. Chamber joined a coalition of organizations in sending a letter to House and Senate leadership opposing the small business tax increase.

The proposal to raise taxes on passthrough entities to pay for the reconciliation measure did not move forward. However, the deal that was reached includes other taxes that would discourage investment and undermine economic growth—making our economic problems worse.

The deal includes a tax hike on carried interest, a share of the profits of an investment paid to the investment manager of a private equity or venture capital firm. Small businesses depend on private equity to grow, and this provision will dampen the appetite and scare some investors away from investing in small businesses.

Plus, a fundamental misunderstanding of small business finances could lead to other proposals to increase taxes on passthrough entities (small businesses).

Yes, and: Additional taxes cut into a small business’s needed cash reserves. Personal reserves are the No. 1 source of funding for entrepreneurs when financial challenges arrive, according to SCORE.

During a time of tighter credit and higher interest rates, personal reserves become even more essential for small business survival.

U.S. Chamber Small Business Council member Stephanie Sims, Founder of Finance Ability, further explains the impact of taxing small businesses in a recent letter to Arizona Senators Krysten Sinema and Mark Kelly. Read the full letter.  

What else is at stake: Raising taxes on small business profits ignores the reality of how small business owners re-invest their gains back into their businesses and their communities, Sims writes.

Penalizing small business owners who wisely build cash reserves to face financial difficulties in tough times not only harms those individuals and their families, but also imperils their current employees and potential new hires.

The bottom line: Any increase in taxes on S corps and other small business passthrough entities would harm the growth of entrepreneurs and small businesses at the worst possible time.

Story by Thomas M. Sullivan, U.S. Chamber of Commerce

Thomas M. Sullivan is vice president of small business policy at the U.S. Chamber of Commerce. Working with chambers of commerce and the U.S. Chamber’s nationwide network, Sullivan harnesses the views of small businesses and translates that grassroots power into federal policies that bolster free enterprise and reward entrepreneurship.