The Standard Business Deduction

The Standard Business Deduction

Kathleen DeLaney Thomas*

In 2017, Congress passed the most sweeping tax reform bill[1]the country has seen in over 30 years.[2]The new legislation responded to many long-held concerns about the U.S. tax system, particularly that taxes were too high and that the corporate and international tax regimes were not competitive.[3]In response to those concerns, Congress lowered individual income tax rates, drastically reduced the corporate tax rate from 35% to 21%, and shifted away from a worldwide system of international taxation.[4]The bill also lowered taxes for pass-through businesses, such as partnerships, S-corporations, and sole proprietorships, by offering a new deduction for up to 20% of the business’s net earnings.[5]

In the months leading up to the tax reform bill, members of Congress also promised much needed simplification of the U.S. tax system, even going so far as to suggest that future tax returns would fit on a postcard.[6]In one respect, Congress delivered on this promise to simplify the tax system. The new legislation doubled the standard deduction, from roughly $6,000 to $12,000 for a single individual.[7]This means that individuals will now claim itemized deductions (e.g., charitable contributions or mortgage interest) only if, in the aggregate, those deductions exceed $12,000 ($24,000 for a married couple filing jointly). The higher standard deduction essentially means that fewer taxpayers will itemize their deductions, which saves time and simplifies tax return preparation.[8]

However, while the 2017 Tax Reform Bill simplifies personal deductions, the legislation does virtually nothing to simplify the tax rules for businesses. Small business owners will not see any reduction in complexity for reporting income, tracking expenses, or preparing tax returns. Instead, the new pass-through deduction only adds further complexity by inserting more steps into the process of calculating a business’s net income.

In short, Congress failed to deliver on its promise to provide simplification when it comes to small business owners. Congress could do more to reduce the complexity faced by these taxpayers, who must pay estimated taxes, track business expenses, and file complicated tax returns. To that end, this essay proposes a “standard business deduction.”[9]

Continue reading