Business owners, Congress, and the ticking tax bomb

Last week the U.S. House voted 235-173 in favor of the Small Business Tax Cut Act legislation “to amend the Internal Revenue Code of 1986 to provide a deduction for domestic business income of qualified small businesses.” Under the new rule, businesses with 500 or fewer employees would qualify for a 20 percent deduction.

The tax break is designed to help defuse what Dan Danner, President of the National Federation of Independent Businesses, called, in an AP interview this week, the “enormous tax bomb that's set to go off at the end of the year” when Bush-era tax cuts expire.

While the Republican-authored bill makes its hapless way to the Democrat-controlled Senate, analysts are parsing the arguments for and against it, to determine what the benefit to small businesses really might be. 

Here’s a roundup of the week’s reporting on the Small Business Tax Cut:

1. The Washington Post’s Fact Checker column compared Rep. Xavier Becerra’s complaint that the bill would give “three percent of the businesses in America 56 percent of the tax breaks” against a report from the non-partisan Joint Committee on Taxation.

The Post determined that, in fact, 34 percent of cuts will go to that minority and the “756,000 businesses making between $250,000 and $500,000…would collect 23 percent of the savings.” The Fact Checker column, which uses a Pinocchio nose rating scale to grade subjects’ truthfulness, gave Becerra (D.-Calif.) three noses for using “significant factual error and/or obvious contradictions,” in his argument against the Small Business Tax Cut Act.

But in a second article on the subject, the column gave four Pinocchio noses (translation: a “whopper” of a lie) to Republican bill sponsor and House Majority Leader Eric Cantor for claiming that the legislation would create 100,000 new jobs per year. The Post noted that Cantor’s estimate contradicts a different conclusion of the Joint Committee on Taxation: that “the effects of the bill on economic activity are so small as to be incalculable within the context of a model of the aggregate economy.”

After dissecting a variety of analysts’ projections about the impact of the one-year tax proposal, the Post concluded that “the clearer thing to say is that the tax cut, if made permanent, would produce a total of 188,000 jobs in seven years, period.” The Post also notes that “the policy would put a dent of at least $40 billion in the federal budget every year.”
 
2. ABC News put that dent closer to $46 billion, but reported that “House Speaker John Boehner said the cut takes ‘the opposite approach of the stimulus’ by empowering employers to make decisions on how more of their hard-earned money is spent.”

3. In the Savannah Morning News yesterday, Jack Kingston (R.-Ga.) cited a study that said the Act would expand the economy by $112 billion. Kingston also repeated Cantor’s 100,000-jobs-per-year-message , saying that, “Whether a business is a corporation or one of the 75 percent of small businesses who operate as a pass-through, it will benefit from this new deduction.”

He explained the potential savings this way: “At present, small businesses can be taxed at up to 35 percent. So a business making $100 would owe Uncle Sam $35 at the end of the year. Under our plan, that small business would be able to deduct 20 percent from its income taxes meaning they would pay taxes on $80, resulting in a $28 tax bill and leaving them with $7 to spend elsewhere.”

4. The Associated Press elaborated on that term “pass-through” that Kingston used:
“Many business advocates [are] calling for lower tax rates for small business owners whose companies are sole proprietorships, partnerships, and what are called S corporations. The profits from these companies aren't taxed—they're "passed through" to their owners, who are then taxed as individuals. Often, their tax rates are higher than those for companies like General Motors Corp. and Apple Inc.”
If Congress doesn’t pass a bill like the Small Business Tax Cut Act to give small business owners a break, AP reported, “the top tax rate would go from 35 percent to 39.5 percent.”

Bottom line for Yahoo! Small Business Advisor readers? If you're one of those aforementioned “756,000 businesses making between $250,000 and $500,000,” the current top rate of 35 percent has meant maximum tax bills of between $87,500 and $175,000.

With the expiration of the Bush cuts raising top rates to 39.5 percent, the bill for that group goes to between $98,750 and $197,500. Even at the 39.5 percent rate, the 20 percent reduction proposed by the Small Business Tax Cut Act would adjust the tax bill of that group of businesses down to between $79,000 and $158,000. 

In other words, if you’re a business owner in that income bracket, your tax bill due this time next year could be $11,000 to $22,500 higher than this year's, or it could be $8,500 to $17,000 lower. Good luck planning your business year around that kind of uncertainty.
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