Trump and the next Congress should ensure the tax code continues to help small businesses
Small Business Saturday is a reminder of something Americans have long known: Main Street is the backbone of the US economy. Our local entrepreneurs help feed our families, supply our schools, and make our communities vibrant.
President-elect Trump said it’s a priority of his to make sure American small businesses continue to succeed. If he and the incoming Republican Congress are serious about this mission, it’s critical that they build on the successes of Trump’s 2017 tax reforms and make permanent one key provision from that law that is set to expire—full and immediate expensing.
“Full expensing” may not sound like the most exciting policy, but it’s the strongest tool in our tax code to help our small businesses.
Here’s how it works.
Businesses, like families, must calculate their income each year. When they do this, they subtract their costs from their revenue to calculate their profits—which makes sense, since the corporate income tax is a levy against profits.
But businesses are not always allowed to deduct what they spend on new investments, such as equipment or machinery. Instead, they have to carry those costs over complicated depreciation schedules, sometimes ranging up to 39 years in length. Full expensing allows for a business to immediately deduct that investment the year the expense occurs. In return, this boosts investment, increases productivity, lifts wages, and creates more jobs.
Full expensing is the epitome of what tax policies should look like: it’s fair, simple, and transparent, therefore making it easier for small businesses to operate and plan for the future. It is the most pro-growth tax policy Congress can offer our local economies.
President Trump and congressional Republicans knew this when they passed the historic Tax Cuts and Jobs Act (TCJA) back in 2017, which is why they included full expensing for short-lived assets in our new tax code. By allowing businesses to fully deduct the cost of new investments, our economy grew faster than projected and Main Street optimism reached all-time highs.
But due to wonky Senate rules, lawmakers had to fit their tax cuts into a 10-year budget window. Unfortunately, many positive provisions were only enacted on a temporary basis—including full expensing. The policy began phasing out in 2022 and will fully expire at the end of next year.
As President Trump and our incoming Congress begin to debate the future of the TCJA, they will have some tough choices to make. If their goal is to ensure our tax code remains one that supports small businesses across the country, making full expensing permanent must be their highest priority.
Some may ask why the TCJA needs to expire at all. If it was a tool for growth and higher take-home pay, shouldn’t the entire thing just be made permanent? While there is a case to be made for a full extension, our deficits have skyrocketed over the past few years. Due to several factors, including multiple pandemic-era stimulus packages that rang in far over their advertised price, our nation’s fiscal situation has never been worse.
Smart tax reform must ask how we can achieve the most economic growth for the least amount of cost. Full expensing is that answer. According to Tax Foundation research, permanent full expensing would produce so much long-run economic growth that it would not only pay for itself, but it would actually reduce long-run debt-to-GDP.
The holiday season is a time for families and communities to reflect on the past year, celebrate their accomplishments, and begin planning for the year to come. Small Business Saturday is a reminder that Main Street is a vital part of our DNA, and our policymakers should focus on policies that support them. The TCJA made big, important steps in lifting up Main Street. The incoming administration should go one step further in the coming year by making full expensing for our job creators permanent.
Daniel Bunn is president and CEO of the Tax Foundation.