Here’s How Harris’s Standard Business Deduction Could Work

Vice President Kamala Harris recently announced a series of proposals aimed at boosting small businesses, including an expanded tax deduction for start-ups and easing requirements for obtaining occupational licenses.¹ But small business owners should pay close attention to another proposal in Harris’s plan: a new standard deduction for businesses.

A standard business deduction would revolutionize taxes for small businesses by eliminating the requirement to track and report business expenses altogether.

Critics were quick to suggest that Harris’s small business proposals lack details and appear hastily thrown together.² But a standard business deduction is not a campaign talking point without substance. It is a serious proposal that is backed by academic research.³ A 2019 proposal for a standard business deduction would set the deduction as a fixed percentage of the taxpayer’s gross earnings.⁴

For example, a standard business deduction might be set at 60 percent of gross receipts. This would mean that if a small business owner grossed $100,000 for the year, they would simply deduct $60,000 and report $40,000 of net income on their tax return.

The standard business deduction would work like the regular standard deduction. The regular standard deduction is a fixed amount that any taxpayer can claim on their tax return instead of itemizing their deductions. Similarly, a standard business deduction would be a fixed amount that small business owners would claim instead of deducting their business expenses.

Taxpayers claiming the standard business deduction would report their gross business earnings on their tax return, subtract the standard business deduction, and arrive at net business income. No receipts or special schedules would be necessary. Like the regular standard deduction, claiming the standard business deduction would be optional for the taxpayer. If a taxpayer’s actual business expenses exceeded the standard deduction, they could instead opt to claim those expenses.

Under our current tax system, small business owners face burdensome tax reporting requirements. This includes people who own a business that employs other people as well as individual independent contractors. With no employer to withhold taxes for them, these taxpayers have to figure out how much they owe and pay the IRS every quarter. If they don’t pay on time or pay too little, they owe a penalty.

Small businesses also have to keep meticulous records of their business expenses. Then when it comes time to file their tax return, they have to fill out additional schedules and hope they haven’t mischaracterized an ambiguous expense.

The process is complicated, confusing, and time-consuming. As a result, many small business owners simply don’t file accurate tax returns, contributing to the over $600 billion of taxes that goes uncollected each year.⁵

But a standard business deduction could convert the process of filing taxes from an hours- or dayslong affair to a matter of minutes.

Such a deduction would vastly simplify the tax system for many small business owners. Taxpayers who choose to claim it could be relieved of the burden of tracking business expenses during the year and could prepare their own tax returns without the need for expensive tax preparation assistance. For people who can import their earnings from a Form 1099 directly into an online tax preparation program, the entire business portion of their tax return could be completed in a few simple steps.

The deduction should be offered only to truly “small” businesses — that is, people earning below a certain income threshold. This is the group for whom tax reporting obligations are the most burdensome and inefficient in proportion to the amount of tax revenue at stake.

Not only would a standard business deduction reduce wasteful tax compliance costs, but it would also reduce IRS enforcement costs, as the government would no longer have to monitor expense reporting by eligible small businesses. This type of simplification would be meaningful to many taxpayers and should be attractive to policymakers on both sides of the aisle.