A few weeks ago, President Obama released a proposal to lower the corporate tax rate, but we noticed it wasn’t getting rave reviews from either the left or the right.
At first, many people thought that this proposal would be good news for small businesses, yet small-business advocates say that Obama’s plan will benefit only a low number of small companies. As if that wasn’t bad enough, these advocates also point out that it will leave many business owners with higher tax bills.
It’s no wonder there hasn’t been overwhelming support for this proposal.
On the surface, Obama’s call to reduce the top corporate tax rate from 35 percent to 28 percent seems great, especially when you add that manufacturers would pay no more than 25 percent. Fantastic, right?
Wrong. Those tax reductions would only be for C corporations. Well-known C corporations are the big names, like General Motors, Co., Apple Inc. and Johnson & Johnson, and these C corps pay taxes on the money they earn.
Seventy-five percent of small business owners choose to become an LLC or S corporation, or they are sole proprietorships and/or partnerships; only 25 percent are set up as C corporations. What’s the difference? In the companies that are not C corps, the earnings from the business are passed to the owners, who report those earnings on their 1040 tax forms as income and pay the tax.
When you look even closer, you’ll find that most small businesses pay a substantially higher tax rate than these C corp reforms. Many small business owners fall into the group of households that have incomes above $250,000 annually, and they will face a federal tax rate of up to 39.6 percent next year. Ouch.
But before you start panicking, remember that this big tax law change is unlikely to make it through Congress in an election year, but it is good to have this on our radar. (And by “our”, I mean that Simons Accountancy is a small business, too!)
Is there anything beneficial in the proposal, or is it all bad news? Happily, the proposal does actually address some real concerns of the small business owner. It will increase the deduction for purchases of equipment, like computers, vehicles and machinery, from the $125,000 it is now up to $1 million. It is scheduled to drop to $25,000 next year, having dropped from 2011’s $500,000. Obama’s proposal would also double the deduction that an entrepreneur can claim for money spent on starting a company, from $5,000 to $10,000, and also allows more companies to use a simpler method of accounting: The “cash method”.
But although the National Small Business Association called the parts of the proposal listed above “positive”, they also called for broad reform of the tax code in the U.S., including individual income taxes.
What do you want to see in small-business tax reform? What would help your business out the most? Is there anything you’d like to keep the same? Please let us know in our comments section, below.
And, as always, if you have any questions about the tax issues for small businesses, please get in touch. We’re never too busy to help our clients, even during tax time! Call (714) 637-4552 or send us an email using our online form.