For small businesses, taxes are a financial and administrative burden that directly impacts their ability to invest in their business, their employees, and compete in the broader economy. In fact, 77% of small business owners reported that federal business income taxes were very or moderately burdensome according to NFIB’s 2021 Tax Survey. This was followed by payroll taxes (69%) and state and local income taxes (66%). The survey also found that 64% of small business owners reported that federal business income taxes create an administrative burden in operating their business. Payroll taxes (60%) and state and local income taxes (58%) followed.
Tax related issues also rank high among small business problems. Of the top ten most burdensome problems small business owners report, four are tax related. At the top of the tax list, federal taxes on business income ranked as the third most severe problem, with 20% reporting it as a critical issue. Property taxes followed in fourth place, state taxes on business income ranked seventh, and tax complexity ranked eighth in problem importance.
Why are taxes so challenging for small business owners? Taxes reduce profits, and profits are the primary source of financing for small businesses – financing owners use to increase wages, for capital investment, and expansion opportunities. And for small business owners, profit levels are not always consistent or predictable year to year. Owners rely on strong profits to often support times of profit declines, which many owners continue to experience in the pandemic. Almost one-third (32%) of small businesses report revenues still below 75% of pre-pandemic levels.
Congress is considering these tax increases and new mandates that will impact small businesses:
· Raising the corporate tax rate from 21%
· Raising the top income tax rate on individually- and family-owned businesses from 37% to 39.6%
· Expanding the estate tax’s reach
· Increasing the top capital-gains tax rate
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· Imposes the 3.8% tax (NIIT, SECA) on all business income earned by S corporations, partnerships, and LLCs
· Enacting elements of the Protecting the Right to Organize (PRO) Act
· Mandating that employers provide paid sick leave and retirement accounts
· Establishing a complicated and inflexible new federal-government-run family and medical paid leave program
One proposed mandate is limiting the Small Business Deduction (IRS Section 199A) which would make it difficult for employers to invest in their business and employees. Congress is also discussing raising the corporate tax rate and raising the top income tax rate on individually and family-owned businesses from 37% to 39.6%. Adding to owner uncertainties, the Biden Administration has proposed expanding the estate tax by repealing the use of stepped-up basis. This would hurt family-owned businesses across the country. Congress is also discussing increasing the top capital-gains tax rate. The Biden Administration suggested raising the top capital gains tax rate to 43.4% which would be problematic to many small businesses. Uncertainty is the enemy of economic growth, and there is plenty of that coming from Washington these days.
Raising taxes and adding new tax mandates will hurt small businesses’ ability to recover from the Covid-19 pandemic, invest in their business, and hire new employees and raise their compensation. The economy is performing better since the onset of the pandemic, but strong headwinds persist. Tax increases will only add to the challenges small business owners are already having to navigate with widespread labor shortages and supply chain disruptions.
 NFIB 2021 Tax Survey
 NFIB 2020 Small Business Problems & Priorities
 NFIB Covid-19 Small Business Survey (19)