Small business owners had a second reason to celebrate on Independence Day in 2025 as President Trump signed a sweeping new bill into law that made a raft of small business-friendly tax provisions permanent. Their celebrations are hardly surprising. One-quarter of small business owners identify federal taxes on business income as a critical problem, and one in five report taxes as the single biggest challenge in operating their business. In other words, taxes are one of the most consistent, challenging, and consequential issues facing small businesses. With the new law, owners are better able to invest in their communities, compete, and grow their business.
Taxes create two distinct burdens for small businesses: cost and complexity. The cost burden is straightforward. Higher taxes reduce cash flow, limit reinvestment, and constrain growth. The compliance burden, however, is less appreciated. While many small business owners rely on accountants or tax professionals, the year-round challenge of tax optimization requires owners to constantly evaluate how the rules affect hiring, investment, pricing, and long-term planning. These assessments consume small business owners’ time, add uncertainty, and divert attention away from running the business. Complexity is its own form of cost.
Taxes create two distinct burdens for small businesses: cost and complexity.
The new tax law directly addressed both of these challenges by maintaining a lower tax liability for small business owners and increasing predictability. Most of the small business-friendly changes were permanent extensions of expiring provisions of the 2017 Tax Cuts and Jobs Act (TCJA), though there was also a critical new provision addressing the expensing of equipment investments.
Chief among the newly permanent provisions is the 20 percent Small Business Deduction, also known as Section 199A. The vast majority of small businesses in the United States are organized as pass-through entities whose income is taxed at individual income tax rates rather than the corporate rate. The Small Business Deduction allows qualifying businesses to deduct up to 20 percent of their qualified business income, significantly reducing their federal tax burden.
If this deduction had expired at the end of 2025 as originally scheduled, it would have resulted in a substantial tax increase for millions of small businesses. A 2024 EY study showcased the immense benefit of the deduction for small businesses, estimating that making the deduction permanent would generate 1.2 million new jobs annually over the first 10 years and 2.4 million jobs per year thereafter. The study also projected a $750 billion increase in GDP from the small business sector over the first decade, followed by $150 billion in additional GDP each year after that.
The new tax law directly addressed both of these challenges by maintaining a lower tax liability for small business owners and increasing predictability.
In addition to preserving the Small Business Deduction, the federal tax law made permanent the lower individual income tax rates enacted under TCJA, which were also set to expire at the end of 2025. Because such a huge percentage of small businesses are pass-throughs that pay individual rates on their business income, these tax deductions have a direct impact on profits and future investment. The permanent lower rates mean more dollars available for expansion, equipment purchases, and hiring, especially since investments are often made years after profits are earned and taxed.
The sweeping legislation further strengthened investment incentives by allowing small businesses to immediately deduct 100 percent of qualifying equipment purchases, up to $2.5 million, double the previous limit. Immediate expensing improves cash flow and encourages capital investment, helping small businesses upgrade their facilities and remain competitive.
Finally, the legislation made permanent the higher estate tax exemption established in 2017. The law increased the estate tax exemption to $15 million for individual filers and $30 million for joint filers. A small business is an illiquid asset, meaning that an owner often faces an enormous funding issue to pay the taxes when they pass it on to an heir. This change provides greater certainty for business owners engaged in succession planning and helps preserve family-owned businesses across generations.
Taken together, last year’s federal tax law creates a more predictable, stable, and growth-oriented federal tax environment for small businesses. The legislative sunset of the TCJA provisions would have been devastating for the small business sector as most small business owners would have experienced a significant tax hike. Add in the more favorable treatment of investments, and the impact on small businesses is clear: A stable tax environment that helps owners plan, invest, and expand with confidence.
Holly Wade is Executive Director of the National Federation of Independent Business (NFIB) Research Center.