Indiana Senate Bill 2 could offer larger tax deductions to small businesses

Small Indiana businesses could save more money under a bill that would offer them larger tax deductions. If enacted, the law would apply retroactively to January 1, 2023.

Under Senate Bill 2, proposed by Sen. Scott Baldwin, Sen. Chris Garten and Sen. Travis Holdman for the 2023 Indiana legislature, small businesses could claim an unlimited deduction for state tax payments on their federal tax returns.

Currently, federal law allows corporations to deduct state tax payments from their federal taxes.

This deduction is unlimited for companies that pay income tax, such as B. Large companies. However, the owners or shareholders of small businesses such as LLCs and S corporations pay their own individual income taxes. These companies are limited to deductions of $10,000. SB 2 would allow small businesses to claim unlimited deductions for government tax payments that large businesses already receive.

Lawmakers estimate the change could result in $50 million in tax savings for Hoosier businesses, leveling the playing field while being revenue neutral and costing the state nothing.

If passed, Indiana would join 29 other states in enacting legislation to circumvent the cap on state and local tax deductions.

The bill was referred to the Senate Committee on Taxes and Fiscal Policy. A hearing is scheduled for future consideration, but no date has been set.

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Christopher Emge, director of advocacy and public policy at the Bloomington Chamber of Commerce, said offering these tax breaks to small businesses would give them more money to invest back in their businesses.

“It’s going to benefit small businesses, where hopefully they can compete a bit with larger companies that can honestly afford to pay more and have bigger benefit packages,” Emge said.

Because many of Indiana’s new jobs are coming from small businesses, said Philip Powell, academic director of the Indiana Business Research Center, it’s important for the state economy to create an environment where businesses and entrepreneurs can thrive.

“If you’re a small business, you don’t have the luxury of a large stash of cash,” Powell said. “Any tax break that the state can offer can go a long way toward helping these companies succeed.”

According to Powell, companies typically find it difficult to obtain credit unless they have been in the market for a long time and have an established revenue stream. Even when a company has potential, banks are conservative, so finding financing can be difficult.

Powell said a tax break is an easy way to support small businesses because they only have to file their taxes instead of having to create new offices or hire more employees.

“Lower taxes reduce spending for companies, and if they don’t have to pay taxes, they take the money and invest it in the company,” Powell said. “Small businesses are the engine of job growth. Cutting a dollar on a small business will have a greater economic impact on the community than cutting a dollar on a larger company.”

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David Audretsch, Adjunct Professor of Management and Entrepreneurship at the Kelley School of Business, compared the situation to whether low-income people would have to pay the same percentage in income taxes as higher-income people. A progressive tax structure that taxes those with higher incomes — like large corporations — makes more sense, he said.

“Small companies are kind of fighting against the wind,” Audretsch said. “They have a lot of disadvantages, so you have to equip them. You have to take care of them.”

Given Indiana’s current $5 billion budget surplus, the state should be proactive in its actions, Audretsch said.

“It’s time for the state to actively invest in the future, that is, to invest its money in what creates a sustainable, liveable future,” said Audretsch. “Small businesses are a great place to do this.”

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