Advocacy: Small-Business Benefit of Tax Expenditures

November 13, 2013

pic-tax-paperThe U.S. Small Business Administration (SBA) Office of Advocacy recently released a report measuring the small business benefits of federal tax expenditures in 2013.

Tax expenditures are provisions in the tax law designed to benefit specific groups of taxpayers. They are similar to spending programs but generally do not involve direct federal outlays. Instead, they work through the income tax system, taking the form of special credits, exemptions, deductions, exclu­sions, and preferential rates. This study estimates the use of federal tax expenditure provisions by small and large businesses in 2013.

This study looks at tax expenditures for each legal form and the tax advantages afforded each under the tax law. The study defines small businesses as: S corporations, partnerships, or sole proprietorships with less than $10 million in gross receipts and C corporations with less than $10 million in assets.

In 2013, the largest federal tax expenditure provisions used by all businesses accounted for an estimated total of $161 billion. The study found that small businesses use approximately 25 percent of that, or $40 billion. Deductions for retirement plans were about 26 percent of all of the large federal tax expenditures for small businesses in 2013. Deductions for health and long-term care premiums by the self-employed represented an additional 13 percent.

Other tax expenditures that benefit small businesses were enacted or expanded specifically to encourage U.S. domestic manufacturing and investment, or to promote investment by small businesses. In 2013, 10 percent of the largest tax expenditures for small businesses were domestic production activities (compared with eight percent for larger firms). Specifically, nine percent of the largest tax expenditures for small businesses were for the Section 179 expensing deduction, as compared with one percent for larger firms.

Recent tax reform discussions have focused on repealing most tax expenditures as part of an effort to create a simpler and fairer tax system. According to the report, most tax expenditures remain part of the tax code for specific reasons and with particular objectives and removing these provisions could cause unintended economic disruption.

For the full report and summary, please click here.