Today the S Corporation Association joined with more than 200 trade associations to oppose the Senate’s latest efforts to raise taxes on small and family-owned businesses.

The letter was spurred by recent reports that lawmakers are considering a tax increase specifically targeting Main Street businesses: an expansion of the 3.8 percent Net Investment Income Tax (NIIT) to include the incomes of S corporations and partnerships where the owners actively manage the business.

The letter was signed by a total of 202 trade associations representing millions of Main Street businesses and tens of millions of American workers. It makes clear that, rather than addressing any “loopholes” or funding gaps, this policy amounts to a $200 billion tax hike on these businesses at a time when they can least afford them:

Expanding the 3.8 percent NIIT represents nothing more than an eleven percent increase in the rates imposed on family-owned businesses.  Based on Treasury data, we estimate up to 1 million small and family-owned businesses, representing over half of all pass-through business activity, would be at risk of having their rates increased under this policy.  This small business tax hike would hurt the ability of businesses that survived the worst global pandemic in a century to remain viable in the coming months.

Expanding the NIIT would raise taxes on small and family-owned businesses when they are profitable, while extending and expanding the “excess loss limitation” rules would hurt them in the next downturn.  During the Great Recession, many businesses were able to survive, in part, due to policies that allowed them to offset their current losses against taxes they had previously paid.  These refunds were particularly important for cyclical industries such as construction, manufacturing, and travel and tourism.  Extending and expanding the “excess loss limitation” rules into the future would prevent pass-through businesses from having this relief in the next recession, increasing the odds that they don’t survive. 

This is ill-advised tax policy and it is being considered at a moment when the economy is no longer growing.  First quarter gross domestic product (GDP) fell by 1.6 percent and many economists and forecasters predict that the second quarter GDP will also be negative.  Meanwhile, the small business sector may already be in recession, as those businesses have lost employment in three out of the last four months. 

Another provision included in the House-passed reconciliation bill also targets Main Street.  That provision would extend and expand the new loss limitation rules that apply to pass-through businesses whose losses exceed $500,000.  The current rules expire in 2026.  In the House-passed bill, the rules would be extended and made more stringent, hurting the ability of these businesses to survive the next downturn.

Congress should avoid raising taxes on small businesses at any time.  With Main Street facing a looming recession, inflation at a 40-year high, unprecedented supply chain challenges, and chronic labor challenges, raising their taxes now is simply reckless.  S-CORP hopes lawmakers will take this message to heart and abandon any efforts to enact these harmful policies.

Click here to access a full copy of the letter