Thus, the federal income tax burden on small firms and its effects on their formation and growth have been perennial issues for Congress. 115-97 (the tax revision act of 2017). If no such rationale can be found, then government support for small businesses may do more harm than good by distorting the allocation of domestic economic resources. Small business tax preferences entail the following economic costs: (1) the foregone revenue and any interest charges from federal borrowing to offset that revenue loss, (2) the resources required to comply with the rules governing the use of the tax benefits and to enforce compliance with those rules, and (3) the opportunity cost of the foregone revenue and the resources devoted to tax compliance and enforcement. How a Small Business Is Defined in the Federal Tax Code

Does the federal tax code use the SBA size standards to determine eligibility for small business tax benefits? Excluded from the list are subsidies available only to small firms in particular industries, such as life insurance, banking, and energy production or distribution. Nor does the list include tax benefits that may be claimed by many small firms but are available to firms of all sizes, such as the Section 41 research tax credit and the Section 168(k) 100% expensing allowance. The act repealed a second small business tax benefit from 2017: the rollover of gains from the sale of publicly traded securities into specialized small business investment companies under Section 1044. Such a difference existed under the tax law that was in effect in 2017. Nevertheless, a recent estimate by the Joint Committee on Taxation (JCT) indicates that their revenue cost could exceed $17 billion in FY2018 (see Table 1 ). Cash-basis accounting can distort a firm's financial position in at least two ways. Exemption from Limitation on the Deduction for Business Interest Expenses

Before the enactment of P.L. Ordinary Income Treatment of Losses on Sales of Small Business Stock

IRC Section 1244 allows taxpayers to treat any loss from the sale, exchange, or worthlessness of qualified small business stock as an ordinary loss rather than a capital loss. Some small firms, however, are exempt from the uniform capitalization rule. Nonrefundable Tax Credit for Pension Plan Start-Up Costs of Small Firms

Under IRC Section 45E, certain small firms may claim a nonrefundable tax credit for a portion of the start-up costs incurred in setting up new retirement plans for employees. 111-148 ) added a provision to the federal tax code (IRC Section 45R) that grants certain small employers a tax credit for nonelective contributions to health plans that cover at least 50% of the cost for participating employees. This section describes the chief arguments for and against government support (including tax preferences) for small businesses. Arguments in Favor of Government Support

Proponents of government support for small business generally cite four reasons why they believe it is justified: (1) the special economic role played by small firms; (2) the financial barriers to their formation and growth; (3) the impact of relatively high marginal tax rates on the formation and growth of small entrepreneurial firms; and (4) the unique opportunities for individual economic advancement created by small business ownership. Some of this support is in the form of tax preferences (or expenditures) available to many small firms.
The federal tax burden on small firms and its effects on their formation and growth have long been matters of legislative concern for Congress. This abiding interest has helped pave the way for the enactment of a series of tax laws in recent years that included targeted tax relief for a number of small businesses.
This report describes the main federal tax preferences that benefit small firms and examines the main arguments for and against government support for small firms in general and for tax benefits targeted at such firms in particular. It addresses the tax preferences that can be claimed only by small firms in a wide range of industries and excludes those targeted at small firms in specific industries, such as the special deduction for small life insurance companies under Section 806 of the federal tax code. The small business tax preferences discussed here reflect the changes in the tax code under P.L. 115-97.
The following small business tax benefits are examined here:
Expensing allowance for machinery and equipment under Section 179 of the Internal Revenue Code; Cash-basis accounting under Section 446; Tax credit for a portion of the costs incurred by small firms in establishing pension funds for employees under Section 45E; Tax credit for costs incurred by small firms in complying with the Americans with Disabilities Act under Section 44; Full exclusion from the capital gains tax on the sale or exchange of qualified small business stock under Section 1202; Exemption from the limitation on the deduction for business interest expenses under Section 163; Tax credit for small firms that offer qualified health insurance coverage to employees under Section 45R; Simplified dollar-value last-in-last-out accounting under Section 474; Deduction for and amortization of business start-up expenses under Section 195; Ordinary income treatment of losses on the sale of certain small business stock under Section 1244; Treating losses on the sale of Small Business Investment Company stock as ordinary losses under Section 1242; Exemption from the uniform capitalization rule under Section 263A; and Use of research tax credit to reduce payroll tax for certain small firms under Section 41.
While available information does not allow for an estimate of the federal revenue cost of the small business tax preferences examined here, a recent estimate by the Joint Committee on Taxation suggests that the cost might exceed $17 billion in FY2018.
Tax preferences for small businesses raise several policy issues. For some, a key question is whether they can be justified on economic grounds. In the absence of such a justification, small business tax benefits, while promoting the survival and growth of firms that can take advantage of them, may cause more economic harm than good by distorting the allocation of domestic economic resources.