NSBA Urges Congress to Oppose NIIT Tax

July 13, 2022

This week, nearly 200 prominent organizations representing well over 100,000 U.S. small, individual, and family-owned businesses signed a letter addressed to House and Senate leaders urging Congress not to raise taxes as part of any effort to enact a budget reconciliation bill this year.

“In the face of a possible recession, 40-year high inflation, unprecedented supply-chain challenges, and chronic labor shortages, raising taxes on small, individually, and family-owned businesses is the wrong approach and should be rejected,” the letter reads.

Summarily stated, two tax increases under consideration would fall entirely on the backs of small, individual, and family-owned businesses, including expanding the Net Investment Income Tax (NIIT), and limiting full deductions for losses by expanding and extending the “excess business loss limitation” for “noncorporate taxpayers.” 

Expansion of the 3.8 percent NIIT in its proposed form as part of an impending reconciliation package represents nothing more than an 11 percent increase in rates imposed on Main Street, family-owned businesses, raising taxes during swings of profitability and limiting means of subsidizing for losses in the next downturn.  What’s more, NIIT provisions were enacted as part of the Affordable Care Act, designed to apply to passive investment income – not the income from active businesses where their owners run the business.  In the current pending Senate legislation, specifically, the scope of NIIT would be expanded to include income exceeding $400,000 earned by pass-through businesses, which are typically categorized as small.

Some lawmakers on Capitol Hill believe the fact that the NIIT does not already apply to small businesses is an oversight or loophole, but corporate tax provisions are a set of their own rules for a good reason, and Congress purposefully did not include pass-through income under the scope of NIIT in the ACA to protect these important and legacy entrepreneurs.

As if hurdles on the path to small businesses success weren’t high enough already, adding insult to injury, expansion of the NIIT to pass-through businesses would mean owners would have to pay the 3.8 percent twice should they earn income from selling their operations.

These approaches are part of legislators’ efforts to find common ground on facets of President Biden’s Build Back Better initiative, and, while NSBA appreciates Congressional efforts to work in a bipartisan manner, the bottom line is that this bill is unfair, and raising revenue on the backs of small businesses—particularly now—is a nonstarter.

NSBA is proud to be a cosigner of this important letter urging Congress to reject any plans to place the responsibility of making up for generations of mismanaged federal balance sheets on the shoulders of the nation’s hardest working population.

Click here to read the full letter.