Is the Tax Cuts and Jobs Act a Help or Hindrance to Main Street?

Is the Tax Cuts and Jobs Act a Help or Hindrance to Main Street?

Statement of
Jane G. Gravelle
Senior Specialist in Economic Policy
Before
Committee on Small Business
U.S. House of Representatives
Hearing on
“Is the Tax Cuts and Jobs Act a Help or
Hindrance to Main Street?”
July 24, 2019
Congressional Research Service
https://crsreports.congress.gov
TE10036

Congressional Research Service
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Introduction
Madame Chairwoman and Members of the Committee.
Thank you for the invitation to discuss the issue of the effect on small business of the December 2017
tax revision (the “Act”) popularly known as the Tax Cuts and Jobs Act.1
The Act was estimated to reduce taxes by almost $1.5 trillion over 10 years.2 It included individual
tax cuts scheduled to expire after 2025, such as tax rate reductions and a 20% deduction for certain
income of pass-through businesses (proprietorships, partnerships, and Subchapter S corporations that
elect to be treated as proprietorships and partnerships). The deduction is phased out at higher
incomes. However, if the pass-through business does not provide personal services and meets and
pays sufficient wages or holds sufficient assets, the deduction is allowed at higher incomes. The Act
included a permanent rate reduction for corporations (from 35% to 21%) and a variety of tax changes
affecting business taxable income, such as a temporary provision allowing full expensing (immediate
write-off rather than depreciation deductions over a period of time) for equipment. For FY2018, the
Act was estimated by the Congressional Budget Office to reduce individual taxes by $65 billion and
corporate taxes by $94 billion;3 $28 billion of the individual revenue loss (as estimated by the Joint
Committee on Taxation) was due to the 20% pass-through deduction.
Aside from the 20% deduction for pass-throughs, other provisions directly beneficial to small
businesses are a permanent increase in the amount of equipment that can be deducted immediately
and an increase in the scope of cash accounting. Provisions that raise taxes include eliminating
graduated corporate tax rates, eliminating carryback of losses, ending the production activities
deduction, limiting the meals and entertainment deduction, and disallowing the employee
transportation and parking deduction.
On the whole, the tax cut can affect small businesses through two different mechanisms: (1) an
increase in overall economic growth that increases demand for their products and (2) a decrease in tax
burdens on investing in and operating their businesses.
Overall Economic Growth
Economic growth can occur through a short-run effect that increases the demand for consumer goods
by individuals and investments by firms. Longer-term economic growth would arise from investment,
but any incentive effects increasing investment would likely be offset by crowding out from increased
deficits.

1 The original title of the law, the Tax Cuts and Jobs Act, was stricken before final passage because it violated what is known as
the Byrd rule, a procedural rule that can be raised in the Senate when bills, such as the tax bill, are considered under the process
of reconciliation. The actual title of the law is “To provide for reconciliation pursuant to titles II and V of the concurrent
resolution on the budget for fiscal year 2018.” For more information on the Byrd rule, see CRS Report RL30862, The Budget
Reconciliation Process: The Senate’s “Byrd Rule”, by Bill Heniff Jr.
2 This revenue cost is without macroeconomic feedback effects and does not include interest costs. See Joint Committee on
Taxation (JCT), General Explanation of P.L. 115-97, JCS-1-18, December 20, 2018, at https://www.jct.gov/publications.html?
func=startdown&id=5152.
3 Congressional Budget Office (CBO), The Budget and Economic Outlook: 2018 to 2028, April 2018, at https://www.cbo.gov/
system/files/2019-04/53651-outlook-2.pdf.
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Short-Run Effects
Although some claims were made for significant short-term growth, with some sources claiming the
tax cut would produce enough growth to pay for itself, most analysts projected a relatively small
effect on the economy in the short run, ranging from 0.1% to 0.8% of GDP in 2018.4 The
Congressional Budget Office (CBO) projected a 2018 real growth rate of 2.7% without the tax cut
and 3% with it, for a 0.3% growth increase due to the tax revision. Real GDP growth in 2018 was
2.9%. This growth rate is consistent with a relatively small first-year effect. Although it cannot be
shown in retrospect how much of 2018’s growth was due to the tax cut, the growth rate in 2018 was
not unusual compared with recent history, as shown in Figure 1. These projections and observed
growth rates tend to rule out pronounced short-run effects and suggest a small product-demand effect
in general.
Figure 1. Growth in Real Gross Domestic Product, First Quarter 2013 Through Fourth
Quarter 2018

Source: CRS Report R45736, The Economic Effects of the 2017 Tax Revision: Preliminary Observations, by Jane G. Gravelle
and Donald J. Marples.
A limited short-run demand side effect is not surprising: for a demand-side stimulus to be effective,
the savings from tax cuts must be spent. A significant share of the tax cut was for corporations that are
more likely to save. Investment incentives might, however, spur corporate spending.
Business investment growth was quite strong in 2018, at a rate of 7%. However, this investment
growth might not be attributed to the tax cut. The most pronounced growth occurred in the first two
quarters of 2018, which would leave little time for planning. The patterns of investment growth were
inconsistent with changes in investment incentives created in the tax revision: the incentive for
buildings was the largest, but this category grew more slowly than the other categories; there was a
tax increase for research and development (R&D), the main component of intellectual property, yet
this asset grew at a rate similar to equipment and faster than buildings.5 In any case, investment

4 See Congressional Budget Office (CBO), The Budget and Economic Outlook: 2018 to 2028, April 2018, at
https://www.cbo.gov/system/files/2019-04/53651-outlook-2.pdf, for projections. For a more detailed discussion of first-year
effects, see CRS Report R45736, The Economic Effects of the 2017 Tax Revision: Preliminary Observations, by Jane G. Gravelle
and Donald J. Marples.
5 See CRS Report R45736, The Economic Effects of the 2017 Tax Revision: Preliminary Observations, by Jane G. Gravelle and
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growth rates are more volatile than overall output growth rates, as shown in Figure 2, and also are not
out of line with the recent past.
Figure 2. Growth in Nonresidential Investment and Subcomponents, First Quarter 2013
Through Fourth Quarter 2018

Source: CRS Report R45736, The Economic Effects of the 2017 Tax Revision: Preliminary Observations, by Jane G. Gravelle
and Donald J. Marples.
Longer-Run Effects
In the longer run, any demand-side stimulus would fade, and aggregate effects on the economy would
depend on supply-side consequences for labor supply, savings, and investment. Under current law, the
marginal tax rate reductions for labor income expire after 2025, and the chained CPI index will
increase these tax rates in the long run. Moreover, even in the intermediate period tax rate reductions
for labor supply are not large (averaging around 2 percentage points, according to CBO).6 In addition,
empirical evidence suggests a limited behavioral response of labor supply to changes in tax rates.7
Similarly, expensing for equipment expires after 2025, although the corporate tax rate changes are
permanent. Long-run effects on investment, however, will likely be offset by crowding out, because a
growing government debt borrows resources that could otherwise be used by the private sector for
investment.

Donald J. Marples. Investment incentives depend on the user cost of capital, which is the forgone earnings of investment tied up
in the capital stock plus the wasting away of the asset. Intellectual property’s dominant asset is research and development (R&D),
and under the Act the tax burden increased on R&D investment. Intellectual property also includes purchased software and
entertainment (such as movies and sound recordings), which did receive incentives. In 2018, R&D grew by 6.7%, whereas
structures grew by 5%. Tax reductions should have had a negligible effect on purchased software because it is short lived and
most of its cost is the wearing out, but this investment increased the most, by 10.3%. Entertainment had a significant decrease in
user cost but grew more slowly than the other assets, at 2.4%.
6 CBO, The Budget and Economic Outlook: 2018 to 2028, April 2018, at https://www.cbo.gov/system/files/2019-04/53651-
outlook-2.pdf.
7 See CRS Report R43381, Dynamic Scoring for Tax Legislation: A Review of Models, by Jane G. Gravelle for a discussion of
the literature.
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There is more variability in the projection of output effects in the longer run. In the intermediate term,
while the individual tax cuts are in effect, most projections of output effects ranged from 0.0% to
2.2% and from 0% to 1% if excluding the 2.2% estimate, which was from a model that did not
account for crowding out.8 By 2027, projected effects on output ranged from a negative 0.1% to 2.9%
or from negative 0.1% to 1.1% if the value from the model not permitting crowding out is excluded.
This long-run effect projection averages about 0.4%; the CBO estimate is 0.6%.9 Note that these
increases represent the cumulative increase in growth rate over time compared to economic output
without the tax revision. For example, a 0.4% increase in output after 10 years implies an increase in
the growth rate each year of, on average, 0.04%, and even an increase of 1% implies an annual
growth rate of one tenth of one percent. These projections suggest a modest, and less certain, growth
effect in the longer run.
Special Issues with Small Business
The analysis above suggests results that assume the effects of the Act on demand are similar for small
and large businesses. The activities small businesses engage in, however, are different from those of
large businesses. In general, pass-through businesses tend to be smaller than C corporations, although
some corporations are small businesses and some pass-through businesses are large (and the majority
of firms of any type are small).10 Table 1 shows the organizational forms of C corporations (taxed
under the corporate tax), along with S corporations, partnerships, and proprietorships taxed under the
individual tax, along with their share of business income and average business income. Within
partnerships, three types are shown: (1) general partnerships, whose partners each have liability
exposure; (2) limited partnerships, whose most partners largely have limited liability, and (3) limited
liability corporations (LLCs), which are organized as corporations but have characteristics that permit
them to be taxed as pass-throughs. Different types of pass-throughs have considerable variability in
their receipt sizes, although on average C corporations have larger receipts.
Table 1. Distribution of Business Receipts and Size of Receipts by Organizational Form,
2013
Entity Type
Share of Business Receipts
Average Business Receipts
C Corporation
60.4%
$12,478,517
S Corporation
20.3%
$1,584,133
Partnership
15.2%
$1,464,726
General
1.2%
$708,820
Limited
3.8%
$3,066,910
LLC
8.9%
$1,295,390
Non-Farm Proprietorships
4.0%
$55,725

8 The excluded model is the Tax Foundation model.
9 CBO, The Budget and Economic Outlook: 2018 to 2028, April 2018, at https://www.cbo.gov/system/files/2019-04/53651-
outlook-2.pdf.
10 See CRS Report R44086, Pass-Throughs, Corporations, and Small Businesses: A Look at Firm Size, by Mark P. Keightley and
Joseph S. Hughes. Some higher-income individuals who have incomes in part from business (such as a consulting business) may
have organized that part of their activities in a corporation in order to take advantage of the lower graduated corporate rates that
existed in prior law.
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Source: Internal Revenue Service, Statistics of Income: Integrated Business Data, Table 1. Corporate Tax Data, Table 16,
S Corporation Data Table 4, Partnership Data Table 1, and Non-Farm Proprietorship Data Table. Data are at
https://www.irs.gov/statistics.
As shown in Table 1, about 60% of business receipts fall in the corporate sector. However, within
activities, there are significant differences, in particular in the two types of industries that produce
investment goods: construction and manufacturing. C corporations account for 78% of
manufacturing, but only 24% of construction. Unincorporated businesses also own a larger share of
structures (55% of nonresidential structures outside public utilities and 96% of residential rental
structures) than their share of business receipts or the total capital stock (which is estimated at 40%).11
Although a full-scale input-output model would be required to determine the aggregate effects, effects
arising from any supply-side incentives for investment could be smaller for smaller business. If most
increase in spending is on investment assets, and the pass-through businesses dominate the
construction industry, it is useful to examine incentives for all structures. Before the individual tax
provisions expire, or if they become permanent, the tax law will provide a negative incentive for
residential construction. The tax law significantly reduced the number of itemizers and the benefits of
itemizing deductions, through the limits on deductions for state and local taxes and a higher standard
deduction, reducing the estimated share of taxpayers benefitting from mortgage interest deductions
from 20.1% to 8.2% and reducing the benefit by 58%.12 Owner-occupied housing accounts for
almost half the stock of structures (48%), and residential including rental accounts for 55%.13 If the
individual tax provisions expire, the effect on owner-occupied housing will disappear as the changes
in the standard deduction and itemized deductions will expire, but smaller businesses will lose their
rate reductions and pass-through deductions, affecting them through both the construction industry (as
the increase in demand for nonresidential structures declines) and their own business in the cost of
acquiring structures. In addition, as long-lived assets, demand for structures is more sensitive than
demand for equipment to an increase in interest rates that would eventually be expected to occur
through crowding out. As time passes, the crowding-out effects of a growing deficit will dominate
supply-side incentives and those effects are expected to occur more quickly and more strongly for
long-lived assets such as structures.
Direct Tax Benefits Provided by the Act
Rate Reductions and the Pass-Through Benefits
The tax revision enacted a number of provisions affecting unincorporated business, with perhaps the
most prominently discussed being the pass-through deductions (sometimes called the Section 199A
deduction). This provision is, as is the case of most other individual provisions, temporary and
expires after 2025. It allows a 20% deduction for pass-through business income, with no restrictions
for married taxpayers with under $315,000 of taxable income and other taxpayers with under
$157,000 of income. The benefit is phased out between $315,000 and $415,000 for married couples
and between $157,000 and $207,000 for other returns. (These values are for 2018 and are indexed for

11 Data from the National Income and Product Account (NIPA) count Subchapter S corporations in the corporate sector and their
data must be adjusted to reallocate this share to pass-through businesses. These estimates adjust for that effect. See CRS Report
R44242, The Effect of Base-Broadening Measures on Labor Supply and Investment: Considerations for Tax Reform, by Jane G.
Gravelle and Donald J. Marples.
12 The Tax Policy Center estimates that the percentage of taxpayers benefiting from the home mortgage interest deduction fell
from 20.2% in 2017 (Table T18-0169, at https://www.taxpolicycenter.org/model-estimates/individual-income-tax-expenditures-
october-2018/t18-0169-tax-benefit-itemized) to 8.2% in 2018 (Table T18-0171, at https://www.taxpolicycenter.org/model-
estimates/individual-income-tax-expenditures-october-2018/t18-0171-tax-benefit-itemized).
13 NIPA’s Fixed Assets data, Tables 1.1 and 5.1, at https://apps.bea.gov/itable/index.cfm.
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inflation). However, earnings from firms whose trade or business is not in performing services (e.g.,
doctors, lawyers) may qualify even though their incomes are above the phaseout. For those
nonservice firms, a deduction is allowed regardless of taxable income up to the greater of (1) 50% of
W-2 wages paid or (2) 25% of W-2 wages plus 2.5% of the unadjusted basis of depreciable assets
when acquired.
Although the pass-through deduction has received a lot of attention, individual business owners also
received rate reductions. For example, at the top income level (above $600,000 in taxable income for
married couples) tax rates fell from 39.6% to 37%, for a 2.6 percentage point reduction in the
marginal tax rate. If the full 20% deduction were allowed, the rate would be further reduced by 7.4
percentage points (20% of 37%). The relative effects, however, vary across the taxable income
categories. Table 2 shows the relative rate reductions and potential pass-through deductions for a
joint return at 2018 income levels.
Table 2. Effect of Changes in Regular Tax Rates and the Pass-Through Deduction, Joint
Returns, 2018
Effect of 20%
Taxable Income
Deduction if
Level
Prior Tax Rate
New Tax Rate
Change in Rate
Eligible
More than $600,000
39.6
37.0
-2.6
-7.4
$480,050-$600,000
39.6
35.0
-4.6
-7.0
$424,950-$480,050
35.0
35.0
0.0
-7.0
$400,000-$424,950
33.0
35.0
2.0
-7.0
$315,00-$400,000
33.0
32.0
-1.0
-6.4
$237,950-$315,000
33.0
24.0
-9.0
-4.8
$165,000-$237,950
28.0
24.0
-4.0
-4.8
$156,150-$165.000
28.0
22.0
-6.0
-4.4
$77,400-$156,150
25.0
22.0
-3.0
-4.4
$19,050-$77,400
15.0
12.0
-3.0
-2.4
$0-$19,050
10.0
10.0
0.0
-2.0
Source: CRS Calculations.
In most cases, the pass-through deduction, if available, has a larger effect on marginal tax rate than
the regular rate reduction, but the magnitude of the overall pass-through deduction is reduced by the
phaseout. The Tax Policy Center has estimated the distribution of the benefit of the pass-through
deduction as well as the effects on marginal tax rates according to income quintile. Using their data,
the rate reduction reduced marginal tax rates by 3.8 percentage points. The pass-through deduction
reduced the average rate by 3.0 percentage points, with the marginal effect likely slightly higher.14
These data suggest that the individual rate cut was as important as the pass-through deduction.

14 For data on the distribution of the pass-through deduction, see Tax Policy Center, at https://www.taxpolicycenter.org/model-
estimates/individual-income-tax-expenditures-october-2018/t18-0213-tax-benefit-20-percent. For data on marginal tax rates, the
tax rate in each bracket for wages and salaries was used, see Table T17-0324, Effective Marginal tax Rates (EMTR) on Wages
and Salaries, 2018, at https://www.taxpolicycenter.org/model-estimates/conference-agreement-tax-cuts-and-jobs-act-dec-2017/
t17-0324-effective-marginal. Effective marginal tax rates were weighted by the distribution of returns that received the pass-
through deduction.
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The limited effect of the pass-through deduction as implied by the rate changes in Table 2 is due, in
large part, to the phase out. A Treasury study estimated that without the phaseout the revenue cost
would have increased the estimated cost by 66%, with 59% of the difference due to the service sector
businesses and the reminder from high-income individuals with businesses that did not have enough
wages or assets to fully qualify.15 The study also found that the phase-outs reduced the share of the
benefit from the deduction from 83% to 72% for the top 5% of returns by income, and from 64% to
47% for the top 1% of returns. The study also found that of the top five business types (ordered by
total business income)—professional services, real estate, finance and insurance, construction, and
health—three of these business types (professional services, health, and finance and insurance)
accounted for 56% of the effect of the phase out, while the other two (construction and real estate)
account for 16%.
The pass-through deduction allowed a way to provide an additional tax cut to unincorporated business
compared with corporate business, as the corporate tax rate was cut from 35% to 21%, or by 14
percentage points, more than twice as large as the overall rate reduction for unincorporated business
(including both statutory rate reductions and the value of the pass-through deduction). One element of
the corporate changes that was not favorable to small business was the elimination of graduated rates.
This graduated structure imposed a rate of 15% on the first $50,000 of income, 25% on the next
$25,000, and 34% thereafter. As a result, small corporations with around $90,000 or less of taxable
income pay higher rates under current law.16
Issues of Complexity
The pass-through deduction presents complications for taxpayer compliance and for administrative
enforcement. A prominent issue has been identifying an ineligible high-income personal service
business. Although this provision’s purpose was presumably to prevent income from personal
services, which is similar to wage income, from being eligible for the deduction, it is not a simple
matter to define personal service income. The law enumerated certain activities (such as health, law,
consulting) and also contained a catch-all category (a business in which the principal asset is the
reputation and skill of one or more employees or owners and reputation of the individual). Even the
enumerated activities are not easy to define (for example, whether medical laboratories are included
in health). The catch-all category could be broadly or narrowly defined. The personal service
provision has also led to “crack and pack” strategies to separate ineligible activities from eligible ones
or combine businesses to maximize eligibility for the deduction. Although regulations have been
issued that provide more detailed guidance, areas of ambiguity will inevitably remain.17 Another area
of complexity is defining the differences between investment activities (in which income is not
eligible) and a trade or business.
The changes in tax rates, pass-through provisions, and graduated corporate rates have created new
considerations of entity choice by taxpayers. As indicated by the tax rates in Table 2, most high-
income taxpayers will have higher rates than rates paid by corporations on business income, but any
dividends will be subject to an additional tax if they incorporate. For most pass-through businesses,
income is subject to an additional 3.8% tax, leading to a top individual rate of 40.8%.18 This tax is not

15 Lucas Goodman et al., Simulating the 199A Deduction for Pass-through Owners, Department of the Treasury, Office of Tax
Analysis, Working Paper 118, May 2019, https://www.treasury.gov/resource-center/tax-policy/tax-analysis/Documents/WP-
118.pdf
16 The exact figure is $90,384. 62. To solve for this value set 0.34*(x-75000) + 13750 = .21x, where x is income.
17 See IRS regulation 107892-18m at https://www.irs.gov/pub/irs-drop/td-reg-107892-18.pdfRegulation.
18 The 3.8% tax is imposed as a net investment tax on capital gains, corporate dividends, and passive income of pass-throughs; it
is imposed as a Medicare tax on proprietorships, active partnership income, and wages paid to Subchapter S owners. Active
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imposed on active business income of shareholders in Subchapter S corporations who have a
maximum rate of 37%. Depending on how much income is to be paid out in distributions, whether the
taxpayer is eligible for the pass-through deduction, and the income level, either business entity form
may be preferable. The maximum combined corporate and individual rate for a high-income taxpayer
is 39.8% if all income is distributed, but is 30.4% if half of income is distributed, and 21% if none is
distributed.19 One complication of changing entity choice is that, with uncertainty about future tax
rates both corporate and individual, individuals moving to corporate form might subsequently find
difficulties in moving back to noncorporate form, as that change may involve some tax payments. (It
is much easier to move from noncorporate to corporate form).
These changes have also affected other planning strategies, such as how much of Subchapter S
owner-employee payments should be for wages. The normal strategy is to minimize wages to avoid
payroll taxes, and the pass-through deduction will increase that incentive because wage income is not
qualified income for the pass-through deduction. This incentive might be offset, however, if the firm
is subject to the limit that involves 50% of wages. The alternative limit that covers wages and 2.5% of
assets may cause businesses to purchase rather than lease assets.
Incentives to Invest in Assets
As discussed below, most investment in equipment and certain building improvements is expensed. In
those circumstances a reduction in the tax rate (either through statutory rates or the pass-through
deduction) creates a disincentive to invest at the margin.20 For equity investment, expensing produces
a zero effective tax rate regardless of the statutory rate. The tax savings from taking a deduction up
front offset the tax on earning (which are discounted because these taxes are paid in the future). For
debt-financed investment, lower rates discourage capital investment because they reduce the value of
interest deductions. In the case of investment in structures and any assets not eligible for expensing,
however, the lower tax rates and pass-through deduction result in an incentive to invest.
The pass-through deduction also produces tax increases in the phaseout range for taxpayers who are
not qualified because they provide ineligible services or do not have enough employee wages or
assets to take additional deductions. The magnitude of disincentives depends on how much business
income was qualified for a deduction. For example, in the case of a joint return, if $100,000 was
eligible for the deduction (with other income from other sources), each dollar of income above
$315,000 of taxable income would result in a $0.20 increase in taxable income as deductions are lost.
This increased tax has the reverse effect of a lower rate.
An investment disincentive is also created if tax rates are expected to expire. The deductions for
expensing take place at a lower rate than the subsequent taxable income which, for example, creates
an effective tax on equity investment whereas a constant rate would produce a zero effective tax rate.
Arguments are sometimes made that the cash flow provided by tax cuts will lead to investment. For
some firms, especially small ones, there may be cash flow constraints that prevent investments, and
across-the-board tax cuts may permit some investment. Whether that outcome is desirable depends on
whether the investment was sound, which may require considering why the firm did not have access
to credit. If there is a credit market failure, addressing that issue directly might be a better alternative.

income of Subchapter S corporation shareholders is not subject to the tax.
19 The tax rate is 0.21+x(1-.21)*0.238, with 0.21 the corporate rate, 0.238 the dividend tax rate, and x the share of income
distributed. If undistributed income is retained until death no capital gains tax will apply.
20 If a firm undertakes all of the desirable investments, the last investment earns just enough profit to be justified and is referred
to as a marginal investment.
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In any case, businesses that are large and successful (and according to data in Table 1 tend to
dominate small business) are not likely to invest a cash windfall, from a reduction in tax, absent
investment incentives.
Both for investment incentive purposes and cash flow issues, more targeted tax approaches than rate
cuts (either through regular rates or the pass-through deduction) exist, such as shortening depreciation
periods for buildings or providing investment credits,21 tax incentives that are contingent on making
an investment.
Depreciation (Cost Recovery)
A second group of provisions adopted in the Act relates to cost recovery. Under prior law, up to
$500,000 of the cost of equipment could be expensed (deducted immediately rather than depreciated
over a period of time), with the amount phased out dollar for dollar beginning at $2 million of
acquisitions. This provision is also referred to as Section 179 expensing. The Act increased the
$500,000 amount to $1 million and the beginning of the phaseout to $2.5 million, and indexed it for
inflation.22 This provision is permanent.
During the years through 2022, this tax provision is not meaningful, because business in general is
allowed to expense equipment without a dollar limit under a general business expensing rule
(sometimes called bonus depreciation). After 2022, a partial expensing rule would make Section 179
expensing relevant, assuming the full expensing for all taxpayers is allowed to expire. Section 179
also remains relevant for certain qualified structures (restaurant, retail, and leasehold improvements),
which were inadvertently excluded from the definition of eligible property for the general expensing
provision, an oversight that also caused an increase in their depreciable lives from 15 years to 39
years. Thus, Section 179 is beneficial for small businesses making structural improvements in their
buildings in certain circumstances.
The phaseout of the expensing (assuming expensing in general expires) creates a disincentive to
invest.
Other Tax Provisions
A number of other tax changes affect small businesses. The Act, for example, contained an expansion
of eligibility for cash flow accounting, which may simplify small business tax compliance. Some
provisions that raise taxes include ending the production activities deduction, limiting the meals and
entertainment deduction, and disallowing the employee transportation and parking deduction. There is
also a restriction on the deductibility of investment interest, but firms with less than $25 million in
gross receipts are not subject to that limit, so it is unlikely to affect most small businesses. The
provisions discussed in this subsection are unlikely to have a significant effect on investment.

21 A flat investment credit is not neutral, as it favors short-lived assets. A credit can, however, be designed to be neutral.
22 For a discussion of these provisions see CRS Report RL31852, The Section 179 and Section 168(k) Expensing Allowances:
Current Law and Economic Effects, by Gary Guenther.
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