Advertisement

Letters to the Editor

Business benefit

September 22, 2010

Advertisement

To the editor:

Critics claim that the Obama tax proposal would harm large “small business” and stifle economic growth. Is this true?

If you own a small business, it’s probably organized (Sub-chapter S) so its taxes are treated as part of your individual tax return.

Consider then this prospect: You’re lucky enough to be in the 3 percent of “small” businesses making more than $250,000 a year. Presume that your income is $1,000,000 and your profit is $600,000 after you’ve paid your employees and bills. You could put this in your pocket, but you’d have to pay $210,000 in taxes under the current law or $227,000 under the Obama proposal.

The one makes you only slightly less grumpy than the other. Then your CPA reminds you, you have a choice. You could really use a new machine to make more or better thingamabobs. So you buy the new machine for $300,000.

But if the tax bill just passed by the Senate last week becomes law, your business may deduct the entire cost of your new machine this year. You pay about $120,000 less in taxes so you’re out only $180,000 for a $300,000 machine.

So, your business becomes more valuable because of your new asset, and next year you presumably will make even more money. The economy benefits because you may need to hire a new employee to run your machine. And you still pay yourself almost $200,000 this year.

So explain again, how is the Obama proposal harmful to small business?

Oliver Finney,

Lawrence

Comments

Richard Heckler 3 years, 10 months ago

Investing in a business is very smart and likely improves the business quality of life. Hiring employees is good for the local economy.

Keep your business money in a real live local bank or credit unions. It's far better for the local economy.

It was those big banks deemed to big to fail that brought down the economy. Why keep money in one of these banks? Of which there are several in this town.

Only 3 major Financial Institutions were at risk in spite of what we were told ? "There were just a handful of institutions that were terribly weakened. AIG the insurer, Bank of America and Citigroup, Those three were clearly in very weakened form. Many of the other big banks simply were not. http://www.democracynow.org/2009/9/10/good_billions_after_bad_one_year

What helped bring on the problem? Substantial fraud was involved. For example, mortgage companies and banks used deceit to get people to take on mortgages when there was no possibility that the borrowers would be able to meet the payments. Not only was this fraud, but this fraud depended on government authorities ignoring their regulatory responsibilities." http://www.dollarsandsense.org/archives/2009/0709macewan.html

0

mysterion 3 years, 10 months ago

Toe... It was selfish greed and an inability to live within one's means that caused the recession.

0

imastinker 3 years, 10 months ago

Oliver - I can see by your numbers that you don't understand what it's like to be in business. It's much more likely for the average business that for a million dollar revenue (this is NOT income - it's revenue. It's only income if you stiff the suppliers), a guy might go home with 75-150k. I'll guess with these numbers that this is a service company with low overhead and maybe two employees. Now, out of the left over money you have to pay regular taxes, self employment taxes, social security (and the matching portion), and several taxes. This doesn't even include unemployment or sales taxes as they are just an expense.

So, you're got a guy who is working a minimum of 60-80 hours a week going home with about what he would be making for someone else if he put in all those hours for another person, and you want to raise taxes? This person is probably down in business from last year anyway and going home with much less than last year because he didn't cut expenses fast enough and lay off an employee. Maybe this year he's going home with 50k.

This is what happens when you have a business. You spend years scrimping and saving to go into business and you take a low salary to have money to invest in the business, and then you finally get to the point that the business is successful and you are making good money to find that you just owe more in taxes? Sure you can afford it - but why bother in the first place?

0

avoice 3 years, 10 months ago

This nails it. The only reason to bother in the first place is to be independent. For many small business owners, that is the whole reason they do it. Probably explains a lot about the Tea Party movement, too.

0

jafs 3 years, 10 months ago

If the net income is below $250,000, then this owner wouldn't be affected by the changes, since they only apply to net income above that amount.

Only 3% of small businesses would be affected.

0

oliverfinney 3 years, 10 months ago

You're absolutely correct: I meant "revenue" when I wrote "income." However, I think my main point is still valid. If a person is "going home with 50k," then the proposed tax increase wouldn't apply to him or her since the business "profit" would be less than $250k. And you're also no doubt correct that ANY tax, increase or not, tends to reduce a person's initiative to work hard--either for one's own business or overtime for someone else. Isn't taxation always a balancing act? The question whether it's "fair" to tax higher income earners at a higher rate is a philosophical one, and there are clearly arguments on both sides of the issue. But the question I was trying to address was, is a 5% tax increase for large "small businesses" going to stifle growth? I think it might well encourage a small business with profits >$250k to invest more, not less. Thanks for your civil response!

0

just_another_bozo_on_this_bus 3 years, 10 months ago

"It's much more likely for the average business that for a million dollar revenue (this is NOT income - it's revenue. It's only income if you stiff the suppliers), a guy might go home with 75-150k."

And for them, there would be no tax increase under Obama's proposal.

0

conqueringhorde 3 years, 10 months ago

The real problem here are the wild and huge number of assumptions.

** Presume that your income is $1,000,000 and your profit is $600,000

This would be extremely rare, as a previous post noted. A 40% profit margin is rare, particularly for traditional brick and mortar business. I run a business with almost no overhead aside from labor, and 40% is not that common on most projects.

I recently overheard a local remark that he and his book keeper sat down and calculated that he pays 60% of his net, after labor and capital into taxes.

** The one makes you only slightly less grumpy than the other.

Actually it has me more than grumpy. I take any shift in the profitability of my business very seriously. It affects my retirement and my wife's medical bills. It affects the Bert Nash, WTC and Headquarters Counseling, the United Way and the several local food kitchens to which I contribute.

** Then your CPA reminds you, you have a choice. You could really use a new machine to make more or better thingamabobs. So you buy the new machine for $300,000.

I didn't know that I needed a new machine. Are you, my CPA, sure of that and why is my CPA giving me advice on production and market. 'Cause I'm really sure I don't. Furthermore, do I have the cash to buy it? Being a debt-free business I'm not going to take out a loan, so I better be sure I need it?

Does the current market merit an expansion or am I in danger of over-expanding production beyond what it will handle. My industry is strewn with the bodies of competitors who expanded too fast, invested too quickly in capital, became debt-burdened and collapsed. There are countless other examples, e.g. construction companies who have combined-billions of dollars of equipment that currently sit idle.

I certainly don't want to have to let go of my employees - I like them. Some of them are my friends, but it's practically easier to lay some folks than it is to unload what WAS a $300,000 piece of equipment, which would probably be worth only a portion of that when used, but which I probably owe more for, if I took a loan for it, which most folks would.

By the way, CPA-o-mine, I don't need a $300,000 machine. I'm not in construction or manufacturing. I'm in a expanding segment of the economy that doesn't require huge capital investment, so I'm not sure that I can make use of that.

[more to follow]

0

just_another_bozo_on_this_bus 3 years, 10 months ago

"I don't need a $300,000 machine."

Then don't buy one, and pocket the $300,000, and even after paying your taxes be happy that that you're still much better off than 98% of Americans, including every one of your employees who make your good fortune possible.

0

conqueringhorde 3 years, 10 months ago

[continued from previous]

** But if the tax bill just passed by the Senate last week becomes law,

You don't seem really sure of that, Mr CPA. I'm not sure what I should do. Are the two inextricably linked, the tax increase and the deduction thingy? Now I'm not sure if I should expand my business or perhaps hunker down.

By the way, Mr CPA, my friends in construction tell me the market is stuffed with new homes and heavily commercial real estate. Why are they trying to spur capital investment in an area of the market so over saturated? Aren't we in danger of propping up prices again, setting us up for another real-estate collapse? Sorry, you're a CPA not an economist. I apologize.

** So, your business becomes more valuable because of your new asset,

Really? There's no danger of the $300,000 machine becoming obsolete and relatively inefficient compared to my competitors? My friends in IT tell me that they have entire store rooms filled with PC's that are obsolete and relatively useless.

In that case, I'd have a very expensive piece of equipment that I'd NEVER be able to unload.

** and next year you presumably will make even more money.

This I can't even begin to create a scenario under which I might find this plausible. The idea that buying a $300,000 piece of equipment would likely end in making more money is so fraught with assumption and over-simplification as to be absurd.

** The economy benefits because you may need to hire a new employee to run your machine

Ditto. In fact, given that the march of technology generally moves toward less labor per unit of production, this is by no mans assured.

And what if instead of hiring someone to work the machine, I had instead hired a nanny who was working his or her way through college or paid for day care or out ate out more at local businesses?

This is a mere smattering (if even that) of the infinite complexities that are involved in business. None of this even begins to touch on the issue of whether my business is in a tangential market to that the small businessmen that comprise the 3%.

I'm by no means suggesting that the economy is going to collapse as a result of raising taxes on folks making over $250,000. I also recognize that most folks live a life facing a myriad of complex variables, making one hard choice after another.

What I am saying is that it's insulting to contrive such an absurd scenario and say, "See, everything's going to be fine." And, if Oliver sought to present a scenario under which someone MIGHT be better, he could hardly have constructed a more fanciful and Dora-The-Explorer-like narrative.

0

jafs 3 years, 10 months ago

What's your take on the most likely effects on small businesses making over $250,000/yr net income?

0

notajayhawk 3 years, 10 months ago

"Presume that your income is $1,000,000 and your profit is $600,000 after you’ve paid your employees and bills."

Seriously?

What color is the sky on your planet?

As for your letter: You don't save $120K on your taxes. You're allowed to expense certain capital expenditures immediately instead of over time, i.e. instead of getting a $12K deduction over the next 10 years you get it all up front. You get that money this year but your taxes are higher in future years.

Also, this is another of Obama's temporary fixes - it expires after 2011. The idea is to, again, 'stimulate' the economy by getting businesses to make those capital purchases now. But we've already seen from the homebuyer's credit and cash-for-clunkers programs that increasing immediate demand tends to lower future demand when the incentive ends. It doesn't fix anything, just postpones the problem.

0

just_another_bozo_on_this_bus 3 years, 10 months ago

Income taxes are an expense, just like lots of other expenses.

But for businesses, there is one big difference.

Whenever you pay any other expenses, it reduces your tax expense.

That's not true of other expenses. When you pay your electricity bill, that reduces your tax liability, but it doesn't reduce the amount you owe for rent or mortgage payments. When you buy a new machine or tool, it reduces your tax liability, but it doesn't reduce the amount you owe your accountant. And so on.

So the income tax is in reality the only expense that literally subsidizes all the other expenses of a business.

0

Jimo 3 years, 10 months ago

So ... the bottom line is that it is exceedingly rare for any small business to involve an owner who derives most if not all of his/her income from that business. Hardly a surprise since the IRS definition of small business includes enterprises that are hardly small.

What's more, it's important to remember than the portion of income under $250k remains subject to the same lower rates.

If you want to know how much additional tax is in question, take your taxable income, subtract $250,000, and multiply the difference by 4%. Assuming you're one of the 3% of "small businesses" whose owner reports more than $250k, that additional 4% is quite unlikely to add up to much more than a rounding error in your revenues. For example, if you have $350k, that leaves $100k subject to the higher tax, 4% of which is $4k -- hardly enough on income of $350k to alter any motivation!

0

Commenting has been disabled for this item.