The Small Business Tax Relief Act introduces graduated corporate tax rates, modifies partnership interest valuation for service providers, tightens tax rules for investment management partners, enhances the self-employment tax deduction for lower earners, and increases the excise tax on corporate stock buybacks.
Angie Craig
Representative
MN-2
The Small Business Tax Relief Act introduces several changes aimed at modifying corporate and partnership taxation. Key provisions include establishing a lower graduated tax rate for small corporations, altering the tax treatment of partnership interests received for services, and reclassifying certain investment gains for investment management partners as ordinary income. Additionally, the Act enhances the self-employment tax deduction for lower-income individuals and increases the excise tax on corporate stock repurchases.
Small Business Tax Act Cuts Rates for Corporations Under $5M, But Hits Investment Fund Managers Hard
The aptly named Small Business Tax Relief Act is a mixed bag of significant tax changes, offering a break for smaller corporations and self-employed individuals, while simultaneously tightening the screws on high-earning investment fund partners. If you run a small business or work for yourself, you’ll want to pay close attention to Section 2 and Section 5; if you’re in finance, Section 4 is the one that will change your world.
The Corporate Tax Break: A Graduated Scale
Right now, most corporations pay a flat 21% federal income tax rate. This bill changes that for smaller players by introducing a graduated rate structure, effective for tax years ending after the law is enacted (Sec. 2). If your corporation’s taxable income is less than $5 million, you get a break on the first chunk of profit. Specifically, the first $400,000 of your taxable income will be taxed at a lower 18% rate. Any income between $400,000 and $5 million still gets taxed at the standard 21%. This is a clear benefit aimed at helping small and mid-sized companies keep more cash flow. For a corporation making exactly $400,000, this 3-point rate reduction saves them $12,000 in federal taxes, which is real money that can be used for hiring, expansion, or new equipment.
Boost for the Self-Employed
If you’re a freelancer, contractor, or small business owner filing as self-employed, Section 5 offers a nice enhancement to your deductions, provided your income isn't sky-high. Currently, you can deduct half of the self-employment taxes you pay (Social Security and Medicare) when calculating your adjusted gross income. Starting for tax years beginning after December 31, 2024, if your Adjusted Gross Income (AGI) is less than $400,000, you’ll be able to deduct three-quarters of those self-employment taxes instead of half. This means lower- and middle-income self-employed people get a better break, reducing their overall taxable income and helping offset the cost of those payroll taxes they pay entirely on their own.
The Finance World Gets a Tax Overhaul
Sections 3 and 4 introduce massive changes to how partnership interests are taxed, which primarily hits the financial sector, specifically investment fund managers (sometimes referred to as the “carried interest” rules). Section 4 is the heavy hitter here. It targets partners who provide investment management services to their partnerships, defining a new category called an “investment services partnership interest.”
For these partners, any net capital gain they receive from the partnership is now recharacterized as ordinary income (Sec. 4). This is huge because ordinary income is typically taxed at much higher rates than capital gains. Furthermore, this income is now explicitly subject to self-employment tax (Social Security and Medicare), which was often avoided under the previous capital gains treatment. This closes a significant tax preference for fund managers, ensuring their compensation for services is treated much like regular wages.
Immediate Tax on Partnership Interests
Section 3 also changes the game for anyone receiving a partnership interest in exchange for services—not just fund managers. If you get a stake in a company as compensation for your work, the IRS will now value that interest as if the partnership immediately liquidated all its assets (Sec. 3). Crucially, the person receiving the interest is automatically treated as having recognized the value as income immediately unless they actively elect not to have this treatment apply. For someone starting a new venture and receiving equity, this means an immediate tax bill based on the potential future value of that interest, even if they haven't seen a dime of profit yet. This shifts the default assumption to immediate taxation, requiring recipients to be proactive if they want to defer the tax.
The Penalty Box Gets Tougher
If you are subject to the new investment partnership rules in Section 4 and you underpay your taxes because you tried to skirt those rules, the penalty for inaccurate reporting jumps from the standard 20% to a whopping 40% (Sec. 4). The government is clearly signaling that it will heavily enforce these new rules designed to curb tax avoidance in the investment management space.
Corporate Buybacks Get Pricier
Finally, Section 6 increases the excise tax corporations pay when they repurchase their own stock. The current 1% tax rate on stock buybacks will climb to 1.5% for repurchases made after December 31, 2024. While half a percentage point might not sound like much, it increases the cost of these transactions for large publicly traded companies, potentially encouraging them to reinvest capital in operations or increase dividends instead of buying back shares.