As Congress and the Trump Administration were developing the Working Families Tax Cuts (WFTC) last year, one of their key goals was to encourage the continued growth and development of America’s small businesses. They succeeded in a variety of ways. While the core small business policies in the bill were extensions of important expiring provisions from the 2017 Tax Cuts and Jobs Act (TCJA), the bill went way beyond that to creatively find new ways to support small businesses.
Most small business provisions in the WFTC centered around helping businesses grow. The most pro-growth provisions included bringing back 100% bonus depreciation for investments with a shelf life, allowing for a return of immediate expensing of research and development spending (with a retroactive clause that allows companies to claim credit for expenses going back to 2022), and the creation of a new 100% deduction for structures used for manufacturing purposes. On top of all this, the bill also permanently extended the 20% small business pass-through deduction rate, helping the millions of business owners who claim business expenses on their individual returns.
The law also made it easier for small businesses to file tax returns, reducing paperwork burdens and lowering the time spent on reporting and filing. Businesses with annual revenue under $500,000 are now allowed to choose to file semi-annual tax reports, as opposed to the old quarterly reporting threshold. It significantly loosened 1099-K reporting requirements for gig workers, allowing Uber drivers to spend more time on the road and less filing taxes. The law also increased the reporting threshold on Form 1099-MISC/NEC to $2,000, reducing the need for millions of very small businesses to file this form.
As many small businesses are family owned, the estate tax can have negative effects on the ability for these businesses to continue to function when an owner passes away. In the past, businesses had to be broken up at times, or core assets like tractors or machinery sold, to pay tax bills when an owner dies. The WFTC helped to ensure more stability in these businesses, and possibly help ensure the future of the small business community in general, by increasing the federal estate tax exemption to $15 million per individual, adjusted for inflation.
The WFTC also included many smaller provisions that helped small businesses. These included the addition of a new employer childcare credit, new retirement plan incentives for employees, and even broader eligibility for home office deductions that allow for detached structures to qualify for deductions.
Small businesses are the backbone of the American economy, representing over 99% of all companies in the U.S. Firms with fewer than 500 employees (which is a general definition of a small business) employ half of the entire private sector workforce, create almost two-thirds of all new jobs, and are responsible for over 40% of U.S. GDP. They are also a core source of innovation, as small firms produce 16 times more patents per employee than larger firms. This is why the WFTC’s focus on helping small businesses grow is likely to significantly help job growth, along with providing tax savings for most Americans. Estimates show long-term net job gains from the WFTC at over 800,000 jobs, along with an average $2,300 tax cut per worker.
Of all the great provisions in the WFTC, the policies created and extended to help small businesses are the most forward thinking and bring the biggest bang for the taxpayer’s buck. When we see strong economic growth in the next few years, be sure to look back at this law fondly, as it provided the foundation for a strong American economy for years to come.