Tag Archive for 'tax reform'

Making tax reform fair for small businesses

General Motors Corp and Georgia’s Motors, Inc. are alike in many ways. Both go to market representing themselves to the world as corporations, legally formed entities standing on their own, capable of entering into contracts and being responsible for themselves and their activity. But while both corporations are required to report business activity for the previous year on a tax return to the IRS, only one actually pays taxes.

In addition to filing a return, General Motors Corp, structured as a “C Corp,” the apex legal business entity, is the one that pays federal taxes at the business rate, currently one of the highest in the world. Georgia’s Motors, Inc. was formed as a Subchapter S corporation, aka “S Corp,” one of the pass-through entities established by law to make being incorporated easier for small firms. Any taxable income reported on its return passes through pro rata to the shareholders, to be added to their personal return and taxed at each one’s individual rate. In our story, Georgia Smith is the founder and sole shareholder of Georgia’s Motors, Inc., one of millions of American small businesses.

Lately, the term “pass through entity” has been used more frequently in news reports about the tax reform proposed by the Trump administration. The increased frequency is because a significant reduction in the business tax rate is being proposed which could put GM’s corporate rate below Georgia’s personal rate, unfairly causing her to pay more per dollar of business income than GM.

The good news is the Trump tax reform drafters recognized this inequity to pass-through entities like Georgia’s. As currently proposed, shareholders of Sub S Corps and other pass-throughs, like a Limited Liability Company (LLC), would still accrue the income of their businesses. But what’s new is that business income would be taxed separately, at the newly reduced, single rate paid on all business income, rather than at the personal rate of the shareholders.

These proposed tax reforms are very important for small businesses because of how their taxable income manifests. Let’s say Georgia’s Motors, Inc., produces $100,000 in business income, which passes through and is applied to Georgia’s personal return. Because of how that income is accounted for, it can create a taxable event typically associated with investments, called “phantom income.” This is when the loss of an investment results in taxable income, but produces no cash to pay the associated tax.

When you hear a small business owner tell you they had a very profitable year, but had to borrow money to pay their taxes, they just described what is tantamount to phantom income. But unlike true phantom income, that $100,000 hasn’t been lost. It actually exists, but in the form of inventory, accounts receivable, equity, etc., but maybe not in enough cash to pay the tax bill when due. And it could get worse: That business income added to Georgia’s personal income could push her into the next higher rate bracket.

By allowing small business owners of pass-through entities to pay a lower business tax rate, in a separate calculation from their personal income, they will have more working capital to invest, and be less likely to experience phantom income.

The small business sector is very excited about the prospects of tax reform, both at the personal and business level, as long as pass-through entities are treated the same as big corporations.

Write this on a rock … Unleash the animal spirits of America’s small businesses with tax reform that includes lower rates applied to all business income.

Tax reform: the hot topic in 2012?

As April 15th approaches, every small business owner is all too keenly aware of the symbolism of this day. Regardless of when you actually file and pay your taxes - many small businesses file extensions or are incorporated, in which case the due date is actually the Ides of March - April 15 has become a metaphor for the government’s hand being in your pocket.

Most agree that the current system is way too complicated. Unfortunately, our Rube Goldberg-like tax code, with it’s thousands of moving parts, is too handy for politicians to monkey around with to suit their political agenda. Consequently, generations of business owners have had to deal annually with any number of new provisions, changes, updates, repeals, sunsets, delayed renewals and court rulings ad nauseum, as they attempt to develop an operating budget, pricing, etc., for each new year.

We wanted to know what you thought about the current system and two of the alternative systems that have been debated over the past 15 years. So we asked this question: “As you prepare for National Income Tax Day, do you think it’s time for tax reform?”

The first option was, “The current system is okay with me,” which was selected by a whopping three percent. The next choice was the flat tax, which was chosen by 69% of our respondents (Steve Forbes, call your office). And finally, those who said a value-added tax system would be best, but only if the current income tax system was repealed, came in at a little less than one-third of our sample.

Based on the results of our poll, it looks like tax reform could be a hot topic in the 2012 elections.

On The Small Business Advocate Show, I talked with Barbara Weltman, tax attorney, columnist, author of J.K. Lasser’s Small Business Taxes, and publisher of Big Ideas for Small Business®, a free monthly online newsletter, about small business tax tips for 2010 and 2011. Take a few minutes to click on one of the links below and let us know what you think of the current tax code and how you think it should be changed.

Listen or Download: New tax planning tips for 2010 and 2011

Listen or Download: Small business tax and filing obligations

Health care reform ideas that work for small business

There seems to be no stopping the government’s plan to begin the incremental takeover and ultimately control of America’s health care system. The most likely bill seems to be the one being written by Senator Max Baucus, (D-Montana), Chairman of the Senate Finance Committee, which would result in a sweeping overhaul of an industry that is one-sixth of the U.S. economy.

But instead of health care reform for its own sake, meaning that the issues that need fixing are addressed and logical adjustments are put in place, what we now have is health care reform for the sake of politics. If you think this is an overstatement, consider this: Currently over 550 amendments have been proposed to the Baucus bill. This ridiculous number of amendments, plus the fact that there is an arbitrary push to get a bill signed into law this year, is proof that this effort is all about politics and has very little to do with quality reform.

America has a filet mignon health care system that is not perfect and could use some fixing. But please explain why we would let this sausage factory we call Congress get control of a $2.5 trillion industry that, unlike any other industry, touches the most intimate aspects of the lives of every American. Why would we allow the same people who have managed Social Security, Medicare, Medicaid and the U.S. Postal Service into de facto bankruptcy to take over our health care system? And shouldn’t the horror we’ve seen with the mismanagement of VA hospitals give us great pause before we hand over our health care system to the government?

You would be correct to point out that the current proposals aren’t about an immediate takeover of the U.S. health care system. But anyone who thinks this isn’t the ultimate plan is living in a fantasy world. Once this bill is passed, the socialized medicine, single-payer system camel will have its nose under the free-market economy tent and it will just be a matter of time before this stinking dromedary will be wreaking havoc in America’s living rooms.

There are many ways the marketplace and government can work together to accomplish true reform, not the least of which would be tort reform, but here is just one:

Take away the employer deduction for employee health insurance expense and replace it with tax credits given to every American to shop around and buy their own health care insurance, the same way we shop for, and buy, everything else. If you, or your employer, want you to have a better plan, you can pay for that with after-tax dollars. With this plan, a federal law would also be needed to allow individuals to buy insurance across state lines, thus avoiding the various state insurance mandates

This simple reform would solve many problems, including but not limited to:
- create a more efficient insurance system
- create more competition – real market-based competition
- create more innovation, both in insurance and health care products and services
- create more marketplace jobs and fewer government jobs
- eliminate an employee being held hostage to a job because of insurance benefits
- eliminate the “pre-existing medical condition” problem
- Americans would become health care consumers, instead of just co-paying patients.

All of these elements would be good for small businesses, but especially because they would help level the benefits playing field in competing for workers.

Perhaps the greatest flaw of this health care reform idea is that it’s simple and would actually work in real life – a concept seemingly foreign to members of the political class.

As always, looking forward to your comments.

The truth about taxing those wealthy small business owners

In case you haven’t been paying attention, in his address to Congress last week, President Obama promised to raise the marginal income tax rate on the top 2% of taxpayers to help pay for his new agenda and to give the other 98% of taxpayers a tax cut. Now, most folks probably think that this elite group of Americans can handle a tax increase. After all, we’re talking about people like Bill Gates and Alex Rodriguez, right? But in his speech, the president goes on to further define the people on his hit list. Specifically, if you have annual taxable income of more than $250,000, you’re wealthy enough to pay more.

Lately there seems to be some confusion about whether this attempt at redistribution of wealth will impact small business owners. So let me provide some clarity with a small business story that plays out across America every year.

This particular small business will put $100,000 on the bottom line of its Profit and Loss statement. Most big businesses blow more than that every year in wasted soap in the men’s rooms. But for a small business to accomplish these numbers, someone had to work extremely hard and very smart, and at some point along the way, risked everything.

The owner of this small business pays herself $75,000 in annual salary. Not too bad by national average income standards, but still less than she made when she worked for a big company and, when the work, worry and risk-taking is considered, not enough. Oh, by the way, this business that our intrepid entrepreneur started from scratch now provides livelihood, benefits and prosperity for the families of its ten employees. Meanwhile, the spouse of this employer has a job elsewhere that pays him $95,000 annually.

It’s important to note that this small business, like millions of others, is structured legally as a Subchapter S Corporation. That means that any profits produced are distributed to the owner as taxable income to be included with her personal tax reporting. Since this couple files a joint tax return, they have annual gross income of $270,000. Allowing for reasonable personal deductions, their taxable income is over $250,000. It should also be noted that a goodly portion of the hundred grand of business income does not exist as cash - it’s tied up in inventory, accounts receivable, etc. - but still taxable.

According to President Obama, this couple, like Warren Buffet and Oprah, is among America’s wealthy and should pay more taxes. But here’s a critical piece of information that I doubt our President understands: Ask small business owners – as I have – what they would do if they paid lower taxes and every one will tell you that they would re-invest that precious capital in their business. That means buying more capital goods and employing more people. In 2009, it might mean surviving.

So, with all due respect, Mr. President, if you want to get our economy going again, not only would you not raise taxes on even one member of the sector that creates over half of the U.S. economy, signs the front of over 70 million paychecks each Friday, and creates most of our new jobs, but you will find out what they need to help them grow their businesses and do that – all of it. Even if it means you have to cut back a little on your ill-conceived Robin Hood act and even if it means you have to let GM, Chrysler and AIG get a little less bail-out money.

And trust me, sir, this strategy will be time and money well spent for our country - and the world. And here’s a political bonus you probably haven’t considered: it will do more to help you get re-elected in 2012 than anything else you could do.

Recently, on my small business radio program, The Small Business Advocate Show, I talked about the difference between the Obama world view and the world view that I believe is good for small business. Take a few minutes to listen to my thoughts on taxes and other issues. And be sure to leave your thoughts.

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