Earlier this week the House Small Business Committee held a hearing entitled “Holding the SBA Accountable” which featured testimony from Isabel Guzman, head of the Small Business Administration.
While most of the hearing focused on other issues, there was an important exchange between Administrator Guzman and Congresswoman Beth Van Duyne regarding Section 199A and its impact on the small business community:
Van Duyne: Last week, Senator Wyden held a hearing regarding the 2025 tax debate and where he stated, quote, Congress needs to address the passthrough loophole that Trump created in 2017. He claimed it was all about small businesses, but it was another bait and switch. Do you agree with the Senator that this is a loophole?
Guzman: Look, as I have shared with this Committee before, you know, the I am not here to talk about tax policy. That is not in my policy bandwidth.
Van Duyne: But do you think that small businesses are getting benefit from the Tax Cuts and Jobs Act of 2017?
Guzman: What I will say is that the tax cuts…that lean towards supporting the large with permanent tax cuts for large corporations and temporary tax cuts for small businesses, so that Tax Cuts and Jobs Act is not good for small businesses. [Emphasis added]
That’s an interesting statement given that pass-through businesses – which make up 95 percent of businesses operating in America, the vast majority of which are small – are eligible for the Section 199A deduction. Thanks to the TCJA, these firms saw their top marginal rates go from 39.6 percent down a full 10 percentage points due to the combined lower marginal rates and the 20-percent deduction.
Administrator Guzman is parroting the often-repeated critique that Section 199A disproportionately benefits upper-income taxpayers. But as S-Corp President Brian Reardon pointed out in an op-ed earlier this year, that analysis is deeply flawed:
Large passthroughs do get the section 199A deduction, but only if they employ lots of people or make significant investments. That’s because section 199A imposes so-called guardrails on large passthrough businesses, so, for example, they only get the deduction up to 50 percent of the W-2 wages they pay. A 2019 Treasury study shows how these guardrails exclude about 40 percent of their income from the section 199A benefit, while a recent Congressional Research Service report observes that the section 199A deduction is neutral with regard to progressivity.
Finally, the latest S-Corp Section 199A study rebuffs the Administrator’s claims. As our EY analysis found, Section 199A supports 2.6 million jobs, $161 billion of employee compensation, and $325 billion of GDP. If those figures aren’t good for small businesses and the broader US economy, we’re not sure what is.