Question about tax on top 2% and small businesses

[lelgt60]

One of the key Republican talking points when trying to get the Bush tax cuts extended for the rich is that slightly increasing the tax on the top 2% will hurt small businesses. Last night, Christine O'Donnell, in her non-concession speech brought up a couple guys who were going to "close their doors" if the tax was reinstated.

What I don't understand is this: The way I understand it, taxes on businesses by and large are on the businesses PROFIT, not their INCOME. PROFIT is what's left over after you've paid employees, paid vendors, bought supplies, and purchased equipment (I know it gets more complicated with equipment and depreciation rules). So, how can a tax on PROFIT ever truly force a business to close? I hear people claim that they "re-invest profit". That's just not right, is it? Re-investment get expensed (at least eventually). So, it doesn't come out of profit, at least from the taxation standpoint.

Could one of you accountants help with a short set of talking points about this?

Thanks.

[Abq_Sarah]

1. For many of us profit is income

Now granted, I don't fall into that 2% but many decisions I make are due to taxes. For business owners who will be hit by higher taxation, they will have to make a decision about taking home less money or cutting back. I can't see that being a make or break situation when it comes to keeping your doors open.

[seleff]

3. not my understanding as an S corp stockholder

If the owner works at the business they can either take income as salary (expensed) share of profit (taxed as ordinary income) or a mix of both. For a business owner that makes more than $250K in profit and salary combined, increasing the top rate would concurrently increase their taxes on income in excess of $250 K. Many S corps make distributions of $ only to cover the tax liability of that income for their owners. The remainder is retained in the business to increase operating capital, value and/or equity. Much of that equity can be cashed in when/if the business is sold with no tax consequence since it has already been taxedThat distribution would have to increase a few percent, or the owners would take a loss in cash flow due to the difference in distribution and tax liability. For an S corp that relies on that profit to grow and pay for new employees, an increase in top rate could cut into that money. On the other hand, many corps take that money an simply put it in stock and real estate investments to 'diversify" their portfolio for the owners.

[WCGreen]

9. You still have to recognize the profit as income whether you remove

it from the company or not.

The best thing to do is accumulate capital so that your basis in the company increases so that you can take tax free withdrawls in jumbo years.

[tsuki]

5. If you are taking home less money, you will be cutting back. But is

that a direct result of taxation. One of the big problems is balancing demand with personnel for maximum service and efficiency.

I noticed a disturbing trend in the '90's. Being a turtle, I planned and plodded, plodded and planned. But, some other business owner I knew went for maximizing profits at the expense of product and services. It worked for a couple of years; they lived the high life, but when the crash came, they closed their doors and filed bankruptcy.

One always has be on guard. The greed bug is a dangerous insect.

[Abq_Sarah]

8. If you're earning less money because of taxation

Then it is a result of taxation. That was my point. Businesses at that level are going to have to decide how to handle taking a personal income hit.

[tsuki]

2. Demand creates jobs, not tax cuts. You can take the tax down to

zero, but if there is no demand for your product or services, you do not hire. You squirrel the money away, or the insurance cabal raises its rate.

How do I know? I ran a small business, successfully, since 1984, and that is exactly what I would do.

[seleff]

4. Agree 100%

[seabeyond]

6. republican definition of small business is not small business. it is where they huge corps

present their company in a manner they get to call themselves small business, but it isnt. it is full of shit. so when they say small business they are not talking about small business.

remember that one

[WCGreen]

10. The overwelhming majority of small business in America make

profits way under 250k.

[alc]

7. small business income can vary greatly

The last one I had, my "profit" varied from $0k to $20k. My "salary" in those years was $0 to $50k and I gave myself another 5-10K at the end of the year from the profit. I kept the rest in the business to pay employees salary and benefits the next year in case it was a down year. That was 2-3 employees (including myself). I've worked for 10-15 person startups having similar issues with profit some years being over $250k and other years having a loss.

That's just my example. There is no typical small business. Some have pretty constant income, some depend on a "big sale" every once in a while, some can manage costs, some have variable costs - it depends on what your product is and who your customers are. They all currently pay more taxes if they make more, they just don't pay a higher rate.

As far as re-investing goes, you can't always do that the year you have profit. You may need to save for a while before you can get a new product designed (can easily be over $100k for first run and patents even on products that look simple). In that case you will probably combine your year's profit with a loan if possible. You also may need save for a while before hiring a new employee to make sure you can continue paying them if sales go down for a few months.

Also, for s-corps (what we're talking about), if your spouse makes $150k (not uncommon for small bus owners) the companies profits will be taxed at the higher rate if they reach $100k.

[WCGreen]

11. But once the money is taxed, you can accumulate tax free capital

in the business...