The coronavirus pandemic has hurt a lot of businesses -- smaller ones in particular. And while there's been relief available for small businesses, like the Paycheck Protection Program, many are still struggling to recover from the events of the past year.
That's a point of concern for real estate investors. Commercial landlords rely on small businesses to pay rent. And if small businesses keep shutting down, it could impact local property values, too.
The good news is that the economy is in a better place now than it was last year, so in time, small business revenue has the potential to pick up. The bad news, however, is that some small businesses could lose out on a major tax break if a new proposal goes through. And if that tax break goes away, some operations could be forced to shutter.
Pulling a lifeline at the worst time
In late July, Senate Finance Committee Chairman Ron Wyden (D-Oregon) released a bill that, if passed, would pull the plug on a lucrative tax break for some small businesses. In 2017, when the U.S. tax code got a major overhaul, a new deduction -- called the qualified business income deduction, or pass-through deduction -- came into the mix. That deduction allows certain businesses to write off up to 20% of their net income.
Clearly, that write-off is a huge source of savings for smaller operations. But now, Wyden is proposing eliminating the tax break completely for small business owners who are higher earners. Specifically, he's looking to begin phasing out the deduction for filers with incomes above $400,000, with a complete phase-out at $500,000 worth of income.
Critics of the pass-through deduction have argued that it favors wealthier businesses owners. And a report from the Center on Budget and Policy Priorities does reveal that higher-income business owners receive a greater share of the deduction than middle-class business owners.
But still, now would be a very bad time to take that deduction away from some of the businesses that would normally qualify for it. Many smaller businesses have yet to recover fully from the impact of the pandemic, and the tax savings they reap from the pass-through deduction could be their ticket to staying afloat.
Reducing or eliminating that deduction could make it harder for small businesses to invest in expansion efforts, hire new staff, and offer customers better service. That, in turn, could threaten the country's overall economic recovery. And it could cause more businesses to close their doors, leaving landlords with unwanted rental vacancies to grapple with.
As of now, the pass-through deduction is set to expire in 2025. Like some of the other provisions of the 2017 tax overhaul, it was only set up as a temporary measure to begin with, and it's too soon to know whether it will be up for renewal or peter out. But if that deduction is pulled for some small businesses in the near term, it could have a very negative impact on real estate investors.