Small business owners in general have long been praised within the United States for their contributions to the economy, especially their impact on job growth and innovation. Thus, the federal income tax burden on small firms and its effects on their formation and growth have been perennial issues for Congress. Many regard small firms as a vital source of job creation and technological innovation. Small firms have also been celebrated as effective vehicles for advancing the economic status of minorities, immigrants, and women. At the same time, some view the federal income tax as an obstacle to the formation and growth of small firms, while others see it as a policy tool for boosting their rates of formation and growth. Going back to the 111 th Congress, seven bills have been enacted that established completely new tax preferences for small firms and extended (and in some cases modified) existing ones: American Recovery and Reinvestment Act of 2009 ( P.L. 111-5 ), Small Business Jobs Act of 2010 ( P.L. 111-240 ), Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 ( P.L. 111-312 ), American Taxpayer Relief Act of 2012 ( P.L. 112-240 ), Tax Increase Prevention Act of 2014 ( P.L. 113-295 ), Protecting Americans from Tax Hikes Act of 2015 (Division Q of the Consolidated Appropriations Act, 2016 ( P.L. 114-113 ), and P.L. 115-97 (the tax revision act of 2017). Small business tax benefits (or preferences) raise three potential policy issues for Congress. First, what is the appropriate definition of a small business in the context of public policy? Two considerations seem paramount in finding an answer to that question: (1) choosing the appropriate size measure (e.g., employment, assets, or receipts) and (2) determining whether that measure should apply to all small business tax benefits, as well as other forms of federal assistance for small businesses. Second, is there a sound economic justification for supporting small firms? If no such rationale can be found, then government support for small businesses may do more harm than good by distorting the allocation of domestic economic resources. Third, are tax benefits the most cost-effective way for the federal government to assist small firms? Small business tax preferences entail the following economic costs: (1) the foregone revenue and any interest charges from federal borrowing to offset that revenue loss, (2) the resources required to comply with the rules governing the use of the tax benefits and to enforce compliance with those rules, and (3) the opportunity cost of the foregone revenue and the resources devoted to tax compliance and enforcement. Other policy options for assisting small firms entail similar costs. This report is intended to shed light on the first two issues by identifying the main nonagricultural small business tax preferences, determining the foregone revenue associated with them, and examining the economic arguments for and against them. An assessment of the relative cost-effectiveness of existing federal small business tax benefits is beyond the scope of the report. The report begins by exploring the challenges associated with crafting a uniform definition of a small business for public policy purposes. It then describes existing small business tax preferences and reviews what is known about the economic contributions of small firms in general. It concludes with a discussion of the arguments for and against government policies to support small businesses. An essential starting point for an assessment of the effects of small business tax benefits is the definition of firms that qualify for the benefits. And on the question of how to define a small firm for the purpose of federal programs to support small businesses, a necessary starting point is the Small Business Act of 1953 (P.L. 83-163, as amended). Among other things, the act granted the Administrator of the Small Business Administration (SBA) the authority to establish size standards for federal programs supporting small businesses. A size standard specifies the maximum size a company can attain (whatever the measure) and still qualify for federal assistance. The act also gave the Administrator the authority to determine what those standards should be and how they should be applied. Since the act's passage, Congress has refrained from creating size standards for specific federal programs, with one exception: agricultural enterprises. Other federal agencies may create small business size standards for programs they administer, but they must gain the approval of the Administrator before the new standards can take effect. While empowering the SBA to select the size standards for federal programs, the act also laid down a basic consideration for identifying small businesses eligible for SBA programs. Paragraph 3(a)(1) stated that "for the purposes of this Act, a small business concern.... shall be deemed to be one which is independently owned and operated and which is not dominant in its field of operation." In the SBA's view, the act and its legislative history established that two principles should guide the agency in setting size standards for all industries. First, the standards should reflect critical differences among industries. Second, federal programs subject to the standards, including those administered by the SBA, should be designed to help eligible small firms improve their performance within the domestic economy. For the programs it administers, the SBA has used three criteria to identify eligible firms since the early 1950s: (1) the average number of employees in the past year, (2) the average annual receipts in the previous three years, and (3) the value of assets. Employment and receipt size determine eligibility for the vast majority of industries listed in the North American Industrial Classification System (NAICS). The choice of criterion hinges on an industry's structural features. The SBA has established three "base" (or "anchor") size standards, which shape its ongoing review of the standard it sets for a particular industry. For manufacturing, mining, and other industries with an employee-based standard, the base standard is 500 employees. For industries with a receipts-based standard, a group that includes most nonmanufacturing industries, the base standard is $7.0 million in average annual receipts. The base standard is 100 employees for firms involved in wholesale trade. For a limited number of industries, the SBA uses other measures of size that are appropriate for their main lines of business. For example, financial assets are used for banking, barrels per calendar-day for petroleum refining, and the share of overall power generation for electric utilities. In setting or revising a size standard for an industry, the SBA uses its anchor standard as the starting point. Whether a size standard is set below, at, or above that level depends on the results of an evaluation of certain industry characteristics, especially average firm size, start-up costs, entry barriers, degree of competition among firms, and distribution of firms by size. The SBA also takes into consideration the impact of a current or proposed size standard on the access of small firms to federal procurement contracts. According to the SBA's current table of small business size standards, standards based on receipt size range from $0.75 million to $35.5 million; those based on employment range from 100 to 1,500 employees; those based on financial assets are set at either $7 million or $175 million; those based on power generation are uniformly set at 4 million megawatt hours; and those based on petroleum refining are set at 1,500 employees and 125,000 barrels per calendar day. The SBA does alter the size standard for particular industries from time to time. Before a proposed change can take effect, however, the agency's Office of Size Standards (OSS) is required to assess the likely impact of the change on the performance of the affected industry (or industries), focusing on the degree of competition, average firm size, start-up costs, barriers to entry, and distribution of industry sales and employment by firm size. OSS uses the results to make recommendations to SBA's Size Policy Board. If the board agrees with the recommendations, it typically advises the Administrator to approve the proposed change. Approved changes must be published in the Federal Register for public comment. The SBA issues no final rule until it has reviewed the comments received from the public, as well as any other new information. Under the Small Business Jobs Act of 2010 ( P.L. 111-240 ), the SBA has the authority to set alternative size standards based on tangible net worth and average after-tax profits for the 7(a) and the 504/CDC loan programs it administers. Until the SBA does so, the act sets the tangible net worth limit at $15 million and the average after-tax profit limit at $5 million, excluding any net operating losses carried over from previous tax years, in the two fiscal years before the date of a company's loan application. The SBA has not established alternative size standards for those programs as of April 2018. The act also required the SBA to review at least one-third of NAICS industry size standards every 18 months and to make "appropriate adjustments" to reflect current market conditions. No later than 30 days after a review is completed, the SBA must file a report on its findings to the House Committee on Small Business and the Senate Committee on Small Business and Entrepreneurship. It is also required to publicize its reasons for modifying or retaining each reviewed size standard. Federal agencies administering programs that reserve a share of procurement contracts for small firms (known as small business set-aside programs) are required to use the SBA size standards. Other federal programs and tax provisions supporting small businesses may use those standards, though they are not required to do so. Agencies are free to develop their own size standards, but they are subjected to a rigorous rulemaking review process overseen by the SBA before the new standards can be applied. An agency must get the approval of the SBA Administrator before a new standard may be used. The SBA's methodology for selecting size standards for industries continues to stir up concerns among interested lawmakers and analysts.