July 11, 2022

Congress Considering Changes to Net Investment Income Tax and Ability to Deduct Losses During Downturns

Lawmakers on Capitol Hill are considering two proposals that would increase taxes solely on small, individually and family-owned businesses.

The two tax increases being considered would (1) expand the 3.8 percent Net Investment Income Tax (NIIT) to individuals and families who actively participate in their business and (2) limit the ability of small businesses to fully deduct their losses during an economic downturn by expanding and extending the “excess business loss limitation” for noncorporate taxpayers.

Together, these increases would raise $400 billion in revenue over 10 years but the impact on businesses would be even greater. Expanding the NIIT would result in an 11 percent increase in the rates imposed on family-owned businesses, according to Reardon Consulting, a government affairs and consulting firm. Up to 1 million small and family-owned businesses, which represent more than half of all pass-through business activity, could see their rates increase under this policy, hurting their ability to recover from the pandemic.

In a letter to Congress, cosigned by FEDA and other trade associations, Reardon Consulting says the proposals are “ill-advised tax policy.” Raising taxes on small and family-owned businesses with the economy on the brink of a recession, a situation which is compounded by the other post-pandemic challenges they face, harms not only these businesses but the families and communities who rely on them,” the letter states.