Women Entrepreneurs Stand to Prosper with a Fairer Tax Code

More than a third of American companies are missing out on billions in tax incentives designed to spark small business investment and growth. Unfortunately for the nation’s economy, these business owners may not realize what they’re missing out on, and neither does Congress.

In the 30 years since lawmakers last overhauled the tax code, the number of women business owners has spiked from 4.1 million in 1986 to more than 11 million today, which represents 38 percent of all U.S. firms. Women-owned businesses employ 9 million people and contribute $1.6 trillion to the economy, despite the fact that many of their companies are unable to fully benefit from tax breaks.

As Republicans in Congress turn their agenda toward tax reform, new research by American University’s Kogod Tax Policy Center has identified several problems that, if fixed, could unleash the full economic potential of women entrepreneurs. We also uncovered a startling lack of overall government research about the impact of tax provisions on women-owned businesses, meaning that lawmakers don’t have critical information they need to correct inequities.

For the report “Billion Dollar Blind Spot: How the U.S. Tax Code’s Small Business Expenditures Impact Women Business Owners,we worked with national advocacy organization Women Impacting Public Policy to survey women business owners nationwide about their use of four key small business tax provisions that will cost taxpayers $255 billion over the next four years. The online survey of WIPP members — companies with at least 51 percent female ownership who represent more than 15 different types of industry — were predominantly small businesses owners, with 96 percent reporting 100 or fewer employees.

Our research found that women business owners can’t take full advantage of these tax incentives because of how they are legally organized and the industries they are in. In fact, 84 percent of women surveyed operate businesses in service industries that are excluded from a $6 billion tax break designed to stimulate small-business growth, access to capital and investment. Similarly, only 12 percent of respondents organize their businesses as C-corporations, excluding the remaining 88 percent from significant small business tax incentives that require businesses to be C-corps to qualify.

Additional key findings include:

  • Only 0.6 percent of women surveyed reported being able to attract capital for their businesses from non-corporate investors by issuing qualified small business stock to potential angel investors under Section 1202.
  • 53 percent of respondents don’t fully benefit from Section 179, a provision allowing businesses to deduct equipment purchased and placed into service, because they don’t know about it or don’t buy qualifying equipment.
  • 86 percent of respondents have never claimed a provision that permits ordinary loss on the sale or exchange of qualified business stock.  

The bottom line is three of the four tax provisions we researched either explicitly exclude service firms or effectively bypass companies that are not C-Corporations or have few capital-intensive equipment investments. Since most women-owned businesses are concentrated in service industries or are organized as something other than a C-Corp and have few capital-intensive equipment needs, they miss out on billions in tax help.

Members of both houses of Congress have reviewed Kogod’s research and are considering the importance of its findings. Yet, to date, neither the U.S. Senate Committee on Finance nor the House Committee on Ways and Means — the two primary bodies undertaking reform — has held a full hearing to assess the impact of the tax code’s small business tax expenditures on women business owners. The lack of government research or congressional inquiry leaves unanswered questions about whether small business tax expenditures are operating as Congress intended.  

Most importantly, the economic might of women entrepreneurs is significant and growing, and Congress must use this once-in-a-generation tax reform opportunity to harness that energy.

Congress must make women business owners a priority in tax reform. They, and our economy, can’t wait another 30 years.

Caroline Bruckner is the managing director of American University’s Kogod Tax Policy Center.

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