While we wait for Donald Trump to flesh out his revised trickle-down tax plan so we can calculate the total damage, Hillary Clinton has offered a small-business-boosting plan that should includes one simple and very welcome tax reform plank: a standard deduction for small businesses.
This proposal will vastly simplify filing for small businesses and entrepreneurs—whether they’re running a business out of their own home, managing a shop on Main Street, or selling online through platforms like Etsy and eBay. Rather than having to track and file forms documenting their overhead costs—potentially including transportation, computer and phone use, maintaining an office, and more—a small business would be offered the option of taking a single, simple deduction. Hillary will ask her Treasury Department to bring together small business owners and leading experts to design this new standard deduction, including its limits and parameters, which existing expenses could voluntarily be replaced, and measures to prevent gaming and abuse—all to advance the goal of making it far easier for small businesses to file their taxes. This proposal would be focused on true small businesses, with restrictions preventing larger businesses or high-income taxpayers from claiming it. Small businesses could still opt to track and deduct their expenses individually, just like individual filers [Hillary Clinton campaign factsheet, posted 2016.08.23].
For individual filers, taking the standard deduction—$6,300 for singles, $9,300 for heads of household, $12,600 for married couples—reduces the risk of IRS audits, cuts the cost of professional tax prep by 42%, and eliminates the need to spend all year documenting expenses and donations. Small businesses would enjoy similar benefits. According to the National Small Business Association, 85% of small businesses pay for professional tax prep, and 46% pay more than $5,000 in administration costs on their federal taxes. NSBA’s survey finds small business owners believe income taxes pose their second-greatest administrative burden, behind only payroll taxes. A standard deduction for small business would significantly reduce those costs and give small businesses more time to do real business.
The Wall Street Journal offers pros that seem to outweigh cons. Filing becomes simpler, especially for self-employed filers like me, businesses still get to choose the better option for their bottom line, and the deduction can be targeted to small businesses by clear criteria of income and/or compliance cost. WSJ’s only cons aren’t negatives, but mere complaints that the standard deduction itself doesn’t lower rates or erase other tax code complications and may not provide much advantage for firms that have software that easily documents expenses.
Instead of issuing a top-down edict with some ad-libbed number, Clinton even promises a little participatory democracy, saying she’ll ask small business owners for input to help figure out just how big the standard deduction should be. Whatever the dollar figure and the income-eligibility limits, the standard deduction for small business is a smart and fair policy proposal, the kind we should be debating as we select our next President.