Evaluating Kamala Harris’ Tax Proposal to Increase Deductible Start-up Expenditures for Small Businesses

Vice President Kamala Harris, the 2024 Democratic nominee for President of the United States, recently announced a tax proposal for new small businesses as part of her vision for an “opportunity economy.”[1] At a campaign event in New Hampshire, Harris told supporters that she intends to increase the deductible amount for new business start-up expenditures tenfold from $5,000 to $50,000.[2] Harris’ proposal would allow “new small businesses [to] spread the deduction out over several years, or delay claiming the $50,000 tax deduction until the company turned a profit.”[3] This represents a departure from current law, which allows small business owners to “elect” into the maximum deduction of $5,000 in the first taxable year of active trade or business, then amortize the remaining start-up expenditures over a 180-month period.[4] 

What Are Eligible Start-Up Expenditures?

Under Section 195 of the Internal Revenue Code (“the Code”), the distinguishing feature of start-up expenditures is that they are pre-formation costs, as they must be “paid or incurred . . . before the day on which the active trade or business begins.”[5] Examples of qualifying start-up expenditures include advertising, various salaries and wages, travel, and analyses or surveys of “potential markets, products, labor supply, [or] transportation facilities.”[6] Conversely, nonqualifying costs include deductible interest, state and local taxes, and research and experimental costs such as software development.[7] 

The Pros and Cons of Harris’ Tax Deduction Proposal

According to aggregated data on Shopify, an e-commerce platform, the average small business owner incurs $40,000 start-up expenditures in their first year of business.[8] Under Harris’ proposal, small businesses would no longer be constrained by the time limitation in Section 195 of the Code,[9] and start-ups often benefit from delaying tax deductions to offset future income as they begin making a profit.[10] As a result, small businesses owners, in theory, are able to save more money in taxes in its early years of operation and may reinvest those savings into their businesses.[11] A corollary effect of Harris’ proposal could be the avoidance of start-ups taking on additional debt, giving new small business owners a better chance to survive the critical early years of business.[12]

Access to capital is one of the main reasons why 18% of businesses fail in their first year.[13] For small businesses that are not yet making money and thus incur a lower tax liability, Harris’ proposal may have little impact on these small businesses.[14] Further, because qualifying start-up expenditures must be paid prior to business registration, the $50,000 deduction could, according to the director of the Grover M. Hermann Center for the Federal Budget at the Heritage Foundation, operate “disproportionately” as a subsidy for larger start-ups.[15] 

Conclusion

Vice President Kamala Harris has declared that small businesses will be among her “highest priorities” as President.[16] While this is a laudable mission, Harris’ plan has limited benefits and may not achieve its intended effect of helping small business owners achieve their entrepreneurial dreams.[17] Nevertheless, many of former President Donald Trump’s tax cuts enacted in 2017 will expire by the end of 2025, which could encourage Congress to examine newer ideas like Harris’ tax deduction proposal.[18]       

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[1] See Kelley R. Taylor, Five New Tax Credits in Harris Economic Plan: What to Know, Kiplinger (Sept. 11, 2024), https://www.kiplinger.com/taxes/tax-credits-in-harris-policy-platform.

[2] See Antonio Pequeño IV, Harris Proposes $50,000 Small Business Tax Deduction For Startup Expenses: Here’s What To Know, Forbes (Sept. 4, 2024), https://www.forbes.com/sites/antoniopequenoiv/2024/09/04/harris-proposes-50000-small-business-tax-deduction-for-startup-expenses-heres-what-to-know/. Harris has described her plan as “essentially a tax cut for starting a small business.” Id. Harris’ proposal is part of her efforts to create 25 million new small businesses during her first term as President. See Megan Cerullo, Kamala Harris Proposes $50,000 Tax Break for Small Businesses, CBS News (Sept. 4, 2024), https://www.cbsnews.com/news/kamala-harris-proposes-50000-tax-break-for-small-businesses/. However, this proposal projected to “cost taxpayers approximately $20 billion over the next 10 years.” Dan Bova, Kamala Harris Wants to Give Small Businesses a $50,000 Tax Deduction. Here’s Why Some Experts Says That Is a $20 Billion Mistake, Entrepreneur (Sept. 5, 2024), https://www.entrepreneur.com/business-news/harris-proposes-50000-tax-deduction-for-small-businesses/479370.

[3] Rebecca Picciotto, Harris to Propose $50,000 Tax Deduction for Small Business Startup Expenses, Ahead of Trump Debate, CNBC (Sept. 3, 2024), https://www.msn.com/en-ph/news/politics/harris-to-propose-50-000-tax-deduction-for-small-business-startup-expenses-ahead-of-trump-debate/ar-AA1pWuwK?ocid=BingNewsVerp.

[4] See I.R.C. § 195(b)(1). New businesses which incur start-up expenditures equal to $55,000 or more in the first year of operation are unable to deduct any start-up expenditures. See id. § 195(b)(1)(A).

[5] See id. § 195(c)(A).

[6] See Here’s How Businesses Can Deduct Startup Costs from Their Federal Taxes, Internal Revenue Service (Nov. 9, 2021), https://www.irs.gov/newsroom/heres-how-businesses-can-deduct-startup-costs-from-their-federal-taxes.

[7] See id; I.R.C. §§ 164(a), 174(c)(3), 195(c).

[8] See Taylor, supra note 1.

[9] See I.R.C. § 195(b)–(d).

[10] See Diana Glebova & Josh Christenson, Kamala Harris’ Small Business Plan Could Cost Taxpayers a Hefty $20B Over the Next Decade: Experts, New York Post (Sept. 3, 2024), https://nypost.com/2024/09/03/us-news/kamala-harris-small-business-plan-could-cost-taxpayers-a-hefty-20b-experts/; § 195(b)(1)(A).

[11] See Andrew Roth, Booker, Flint Business Owners Tout Harris Plan to Increase Startup Tax Credits, Michigan Advance (Sept. 21, 2024), https://michiganadvance.com/2024/09/21/booker-flint-business-owners-tout-harris-plan-to-increase-startup-tax-credits/.

[12]See What to Know about Harris’s Proposed Tax Breaks for Small Businesses, Fast Company (September 4, 2024), https://www.fastcompany.com/91184453/harris-tax-incentives-small-businesses-what-to-know.

[13] See Mehdi Punjwani & Sierra Campbell, Small Business Statistics in 2024, USA Today (June 18, 2024), https://www.usatoday.com/money/blueprint/business/business-formation/small-business-statistics/ (highlighting how, according to a CB Insights survey, 38% of startups fail “as a result of being unable to secure financing or running out of existing funds”). Moreover, roughly 50% and 65% of small businesses fail within the first five and ten years of business, respectively. Id.

[14] See Jeff Stein, Kamala Harris Pitches $50,000 Tax Benefit in Bid to Spur Startups, The Washington Post (Sept. 3, 2024), https://www.msn.com/en-us/news/politics/kamala-harris-pitches-50000-tax-benefit-in-bid-to-spur-startups/ar-AA1pV3yx?ocid=BingNewsVerp; I.R.C. 195(b)(1).

[15] See Alec Schemmel, Conservative Economists Pour Cold Water on Harris’ New Small-Business Tax Proposal, Fox News (Sept. 7, 2024), https://www.foxnews.com/politics/conservative-economists-pour-cold-water-harris-new-small-business-tax-proposal (explaining how the director emphasized the “minimal” start-up costs small business owners incur prior to business registration).

[16] See Megan Cerullo, supra note 2.

[17] See Punjwani & Campbell, supra note 13; Jeff Stein, supra note 14 (discussing the “limited impact” of tax deductions on new businesses and suggesting that larger companies might “game[]” Harris’ proposal for their own gain).

[18] See Fast Company, supra note 12; Juliana Kaplan, New Business Owners Could Get a $50,000 Tax Deduction Under Kamala Harris’s Plan, Business Insider (Sept. 3, 2024), https://www.msn.com/en-us/money/smallbusiness/new-business-owners-could-get-a-50000-tax-deduction-under-kamala-harriss-plan/ar-AA1pWptW#image=1 (arguing that the success of Harris’ tax proposal “will depend on the makeup of Congress” following the 2024 Presidential election).