Congress is inching closer to passing President Donald J. Trump’s legislative opus—“One, Big Beautiful Bill.” There is an emerging debate over the deficit impact of the legislation and the issue of spending reforms tied to Medicaid work requirements not being implemented quickly enough. Another issue that has emerged is a provision that will impose a stealth tax increase on small businesses if enacted.
Overall, Trump’s effort to push an overall tax cut for American taxpayers and businesses is to be applauded. The White House is promoting this effort as “the largest tax cut in American history.” They point to “PERMANENT tax cuts and bigger paychecks,” “NO TAX ON TIPS,” NO TAX ON OVERTIME,” and “historic tax relief to Social Security recipients.” These are all great changes to tax policies, but when you read the fine print of what Congress is considering, you see that some small businesses will get a tax hike.
The problem is a provision in the bill that some call a “glitch.” Ryan Ellis wrote over at National Review that the tax code allows businesses with separate tax entities to deduct ordinary and necessary business expenses in the form of state and local taxes on business profits. Tax policy is complicated, but it is easy to understand that the federal government has traditionally allowed all businesses to deduct state and local taxes from federal tax liability.
A problem arose when the House Ways and Means Committee preserved companies’ right to make this deduction, “with one notable exception — specified service trades or businesses, known as ‘SSTBs.’ These scarlet-letter companies are already discriminated against in the tax code, their owners (beyond a small income phaseout) being unable to claim the ‘Qualified Business Income’ (QBI) deduction for reasons no one quite understands. But now these companies— and these companies alone — have been singled out and told they can no longer deduct entity-level taxes paid by their businesses.” I am no tax expert, but a layman’s explanation is that Congress used this tax on small businesses to pay for other cuts in the bill.
One of the little secrets in Washington is that Congress relies on the Congressional Budget Office (CBO) and Joint Committee on Taxation (JCT) to figure out how much a bill “costs” the federal government—including letting current policy expire. The truth is that tax cuts cost nothing, because private sector money is not the property of the government, but that is another matter. Congress wants bills to have a lower cost on paper, and they have been considering adding sneaky new tax hikes all over the bill so they can have opportunities to add new popular tax cuts. The trading of tax provisions favors those with members from high personal income tax states who want to preserve the SALT deductions and other special interest tax provisions, which nobody outside the DC Beltway will notice.
It appears that the SSTB companies potentially remain on the short end of the stick if this glitch is not fixed. The small businesses swept in for a tax hike include doctors, nurses, and other medical professionals organized as S-corporations and partnerships. I am sure that these professionals will be upset when they find out that they were targeted for a tax hike for no good reason.
Other SSTB companies include financial and legal services professionals who are also organized as S-Corps or partnerships. If this passes, the firm you use to prepare your personal taxes will also pay higher taxes. The financial planner who helps you plan for retirement will also be hit with a significantly higher tax bill. If you are working on an estate plan, that professional will be paying higher taxes. Basically, the professionals we use for legal, financial, and health professional services are targeted for a tax hike in Congress’s current version of the “One, Big Beautiful Bill.”
I can’t imagine that President Trump’s team is not pressuring Congress to fix this provision before it leaves the Senate for the President’s desk. NPR reported on November 26, 2024, that Trump said at a North Carolina rally the day before he was elected president, “My plan will massively cut taxes for workers and small businesses, and we will have no tax on tips, no tax on overtime, and no tax on Social Security benefits.” The companies targeted by the House Ways and Means Committee are small businesses, and the committee is violating a campaign promise Trump made to voters.
This legislation will likely be changed quite a bit before it passes both chambers for President Trump’s signature. Congress should restore the deduction of state and local necessary business expenses for specified service trades or businesses to complete President Trump’s promise of a tax cut for all.