California’s Small Business Tax Deduction at Risk

Categories: California Business NewsCalifornia News

The heart of California's economy, small businesses play a crucial role in community and economic growth.

News Summary

A report from the NFIB highlights the urgent need for California lawmakers to make the 20% Small Business Tax Deduction permanent. Small businesses, accounting for 99.9% of all businesses in the state, could face significant tax increases if the deduction expires. This could lead to job losses and slow economic growth, undermining the state’s vibrant entrepreneurial landscape. The report projects that maintaining this deduction could generate 141,000 new jobs and contribute billions to California’s economy, emphasizing its critical role in supporting small business stability and growth.

California — A report from the National Federation of Independent Business (NFIB) released on April 15, 2025, highlights the critical importance of making the 20% Small Business Tax Deduction a permanent feature of California’s tax code. With approximately 4.2 million small businesses operating in the state, the expiration of this tax deduction could lead to substantial tax increases for these businesses, posing a threat to jobs, economic growth, and financial stability.

If the deduction is not made permanent, small businesses could face a staggering tax rate of 52.9%. In contrast, C-Corporations maintain a lower tax rate of 29.84%. The disparity in taxation rates could create an unequal playing field that disadvantages small businesses, which make up an essential component of California’s economy, constituting 99.9% of all businesses and employing over seven million people.

The potential consequences of letting the deduction expire are profound. According to projections, California could see an annual increase of approximately 141,000 new jobs over the next decade if the deduction is retained. Furthermore, the annual gross domestic product (GDP) is expected to benefit significantly, with a forecasted increase of $9.78 billion in the first decade, and escalating to $20.2 billion per year beyond 2035.

John Kabateck, NFIB California State Director, emphasizes the grave implications for small businesses if the deduction continues to be temporary. A massive tax hike could severely impact the financial health of these entities, prompting economic slowdown and increased financial strain. Since small businesses represent the backbone of California’s economy, the loss of this deduction could reverberate throughout the state.

The 20% Small Business Tax Deduction originated as part of the Tax Cuts and Jobs Act of 2017. Its objective was to provide relief and incentives for small business owners, empowering them to expand operations, create jobs, and increase employee wages. Recent polling data suggests that the sentiment for making this deduction permanent is gaining traction among the general public. Over 80% of Americans support the idea that the federal government should prioritize the reinforcement of small businesses, and 93% believe the permanence of the tax deduction is a Congressional priority. This widespread concern is echoed by 95% of those surveyed who acknowledge potential adverse impacts stemming from the deduction’s expiration.

With small businesses facing significant hurdles, advocacy groups like the NFIB remain active in lobbying efforts to influence legislation favorably towards small business interests. As California grapples with the decision to maintain or revoke such tax benefits, the economic stakes are considerable. The manufacturing, retail, and service sectors within the state rely heavily on small businesses, and any reversible damage could likely hinder growth trajectories.

California’s economy has long been characterized by innovation and entrepreneurial spirit, both of which depend heavily on the successful operation of small to medium enterprises. As discussions regarding tax policy continue, the preservation of the 20% Small Business Tax Deduction appears to be pivotal for ensuring continued job creation and overall economic vitality within the state.

In summary, the NFIB’s report underscores the urgency for California lawmakers to address the fate of the 20% Small Business Tax Deduction before its scheduled expiration. Its continuation is expected not only to sustain existing jobs but also to create a conducive environment for future employment opportunities and economic expansion.