Carolina Law Professor’s Tax Proposal Aims to Simplify Life for Small Business Owners

For over a decade, University of North Carolina law professor Kathleen Thomas has pondered a vexing question: Why do some people pay their taxes while others don’t?

Her research into small business tax compliance led her to a novel solution gaining traction in policy circles — the “standard business deduction” (SBD).

“Much of my research agenda from the very beginning has been about small business tax compliance,” Thomas explained. “I’m really interested in why people pay or don’t pay taxes, and how we can make the system work better for everyone involved.”

Thomas first developed the SBD concept in 2016, initially focusing on gig economy workers. The proposal aims to reduce the tax reporting burden for small-scale entrepreneurs and independent contractors by allowing them to claim a fixed percentage of their gross income as a business deduction.

“If I’m an Uber driver, I have to pay estimated taxes every quarter. Nobody’s going to tell me or remind me or send me a bill or pay it for me,” Thomas said, illustrating the challenges faced by many small business owners.

Based on IRS data of average profit ratios, Thomas proposes a 60% standard deduction. “This would mean an independent contractor earning $50,000 per year would claim a $30,000 SBD and report $20,000 of net business income on their tax return,” she explained.

The proposal is designed only for “small” businesses, that is, those with earnings below a certain threshold. Thomas suggests such a limit might be $100,000 of gross earnings and $150,000 of adjusted gross income, or policymakers could choose to define small business at a higher threshold.

Thomas acknowledges that setting the deduction amount is challenging due to varying profit ratios across different business types. “Drivers who have a car, and the car depreciates, and they have to fill up with gas, they tend to have more expenses. But if I’m providing a service that doesn’t require much equipment or supplies, I actually don’t have a lot of expenses,” she noted.

To address this, she proposes starting with a limited scope and potentially expanding later. “I tend more towards sacrificing accuracy for simplicity,” Thomas said. “We could start with a limited deduction and see how it goes, maybe expand it later, rather than dropping a whole complicated list of categories on people right away.”

The proposal has caught the attention of policymakers, with Thomas recently meeting with a senator’s staff to discuss potential legislation.

“This is the one proposal that has always gotten the most interest, that I always thought had the best shot because it’s pretty bipartisan,” Thomas said. “It’s hard to oppose small business, oppose a reduced burden for taxpayers.”

As the proposal gains momentum, Thomas hopes to see it implemented, potentially revolutionizing tax filing for millions of small business owners and independent contractors nationwide.

For a more detailed explanation of the standard business deduction proposal, please see Thomas’ op-ed in Tax Notes.