President Joe Biden’s $1.9 trillion includes a handful of worthwhile measures, such as $20 billion for vaccine distribution. Unfortunately, these items are paired with a national $15 minimum wage that would raise labor costs for small businesses, forcing them to lay off employees, increase prices, or possibly close altogether if they cannot compete with their larger competitors. Small businesses are in desperate need of cash-flow right now, with about 500 firms a day closing permanently and many more at continued risk without additional aid. They cannot afford higher costs.
Fortunately for the president, a slight tax change in the way firms deduct losses could help small businesses survive, while having no impact on the deficit over the long run.
Joe Biden could help thousands of small businesses survive the pandemic by allowing them to accelerate their Net Operating Loss (NOLs) deductions, using it now rather than having to wait and carry them forward to future tax years. This policy would allow businesses to monetize the losses they incur and receive a tax rebate based on their tax rate. For example, a corporation that incurs $100,000 in losses gets a rebate of $21,000 since the corporate tax rate is 21 percent. To provide the maximum benefit to pass-through firms — that is, business owners that choose to pay their business taxes on their individual taxes — the tax refund should be set at the top individual tax rate of 37 percent. This change would provide a desperately needed cash cushion to thousands of businesses that cannot take advantage of the NOL deduction this year
The NOL deduction is critical to helping firms survive economic downturns by smoothing out their tax expenses. It allows businesses to carry forward their losses to future tax years and deduct them from their future profits, or, thanks to the CARES Act, to temporarily carry them back to previous tax years and get a tax refund on previously paid taxes.
But it’s not designed to its maximum potential. Currently, it does nothing for the over 800,000 new businesses that opened in 2020 that have no previous tax years to carry back their losses. The only benefit they get from the NOL deduction is the ability to carry losses forward to future tax years. That’s less helpful for a couple of reasons. For one, carryforwards are not as valuable to businesses because of inflation. More importantly, however, tax benefits today, when businesses are struggling, are more valuable than deductions years from now when they’re turning a profit.
Allowing businesses to accelerate their NOLs instead of carrying them forward would just change the timing of a tax benefit to make it hit when it counts. It would not greatly impact the federal deficit. The only budgetary impact would result from businesses that accelerate their NOLs and go out of business, since the government would be giving them a tax benefit that they wouldn’t have gotten otherwise if they’d had to carry forward their losses. But that’s a small price to pay for the thousands of entrepreneurs the provision could save during the pandemic.
In fact, if Biden passes his plan to raise tax rates on businesses, advancing NOLs could actually increase federal revenues, as businesses would accelerate their NOLs at a lower tax rate today than they would be deducting in the future.
By swapping out the $15 minimum wage proposal with this simple policy change, Biden could get Republicans to agree to pass his stimulus plan. They’ve already agreed to provide $960 billion to small businesses through the Paycheck Protection Program (PPP). Providing additional aid to thousands of small businesses by allowing them to advance their NOLs could be what gets this plan the needed 60 votes in the Senate.
Biden’s proposed minimum-wage increase would result in thousands of businesses closing their doors for good. Instead, he should save thousands of businesses by making one small tax change and allow businesses to accelerate their NOLs.