U.S. small businesses already under attack by COVID-19 could pose another threat to the bottom line in the form of tax proposals from the Biden government – with some proponents warning that higher taxes could put a brake on Main Street.
The Small Business Administration defines small businesses as those with fewer than 500 employees, and over 99.7% of employing companies have fewer than 500 employees.
The American Family Plan and the American Employment Plan currently working in Congress could add to the tax burden on small businesses, some observers say, which could hit Main Street with unintended reform implications.
According to the White House, the plan aims to “expand the middle class, extend the benefits of economic growth to all Americans, and make the United States more competitive,” which are worthwhile goals to be achieved when the economy is slow recovered.
The draft tax plan currently circulating in Congress aims to raise the country’s corporate tax rate from the current 21 percent to 26.5 percent – less than the 28 percent proposed by Biden this year. Major Democrats, however, are pushing back some measures such as increasing corporate and capital gains taxes.
Lawmakers plan to vote this week on the proposals that would raise trillions of dollars from corporations and high-income households to pay President Joe Biden’s massive partisan infrastructure and social spending bill.
“The president made it clear from the start that he was willing to compromise,” Gina Raimondo, US Secretary of Commerce told Yahoo! Finance Live this week.
“The important thing is that the president’s Build Back Better package is good for business,” she added.
Under the proposal, the enterprise rate would be reduced to 18% for small businesses with incomes less than $ 400,000; all other companies would continue to pay the current rate of 21%.
“It is crystal clear that this package is good for business and makes investments that improve business competitiveness,” said Raimondo.
The story goes on
“We need investments. We need a better trained workforce. We need employees with digital skills. We need every American who has broadband and is digitally literate. We need affordable childcare, ”she added.
The Democrats in Congress also add a 3% surcharge on revenues of more than $ 5 million a year – targeting the wealthiest American households. Biden did not support such a surcharge.
“Just leave it alone”
Co-owner Jonathan Katz talks to new members about a membership form outside of Risky Business, which was once The Other Door but closed during the Covid-19 pandemic in the North Hollywood neighborhood of Los Angeles, California on May 21, 2021. (Photo by Patrick T. FALLON / AFP) (Photo by PATRICK T. FALLON / AFP via Getty Images)
However, Raimondo’s views conflicted with several small business analysts who spoke with Yahoo Finance. The government previously cited an analysis by the Treasury Department claiming that “the president’s agenda will protect 97% of small business owners from income tax increases”.
However, Raymond J. Keating, Chief Economist of the Small Business & Entrepreneurship Council (SBEC) argued that these numbers are misleading as many small businesses are organized as C-corporations that pay taxes on income.
According to a U.S. Chamber of Commerce (CoC) analysis of the IRS and census data, around 1.4 million small businesses organized as C-Corporations will face a tax hike as part of President Biden’s corporate tax hike.
“You look at a subset of data every year and you have to look at the whole picture,” Keating said in an interview with Yahoo Finance.
And according to Ben Johnston, COO of Kapitus, a small business lender, about 25% of Main Street businesses are “structured as C-corps and will feel that tax hike.”
However, separate data released by the Brookings Institute shows that the majority of companies in the United States are not C-corporations. Rather, 95% of small businesses are “transit companies” whose income is passed on to their owners for taxation as individual income.
However, any kind of increase would come when small businesses can least afford them after months of closures, restrictions, and increased costs associated with the recovery from COVID-19.
“Just leave it alone,” Keating said.
“Openly let investors, entrepreneurs, small business owners and large corporations get back on track and get the supply chains back on track and create jobs and anything we want,” he added.
Tax increases are always negative, but tax increases when trying to recover from a pandemic are just really bad advice.Raymond Keating, Chief Economist, Small Business & Entrepreneurship Council
As the CoC found, Biden’s corporate tax hike will hurt small businesses in all sectors of the economy: “Agriculture, Construction, Healthcare, Real Estate, Finance, and more”.
A recent Small Business for America’s Future survey of 1,000+ small business owners found that 76% of small businesses say they will be harmed when large corporations or corporations use loopholes to avoid taxes.
A majority say they don’t think raising taxes on Americans who make over $ 400,000 a year would hurt small businesses.
Biden has called for inheritance to be treated like a sale that would require heirs to pay taxes in the event of death, with profits of over $ 1 million for single parents and $ 2.5 million for married couples. However, this measure would create a new level of taxes on trusts, property or assets – including small inherited businesses or farms – that are passed down from generation to generation.
Someone who could potentially be affected by the new proposals is Mike Gilmartin, CEO of Commercial Creamery, a family business founded in Spokane, Washington, in 1908.
“Hitting this generation with a tax change … I didn’t plan on doing that, and there is no way my kids will be able to raise that money,” Gilmartin said in a new video series for the National Federation of Independent Business ( NFIB).
The “tiered basis” allows family members to pay capital gains only on the increase in value of the property since the inheritance of the business, not on the full increase in value since it was bought by the parents or grandparents.
“I bought my first shares in 1977, when I started I got shares, I bought some shares that year so the capital gains are big, not just because we’ve been great every year over the time it’s grown have cut off, ”explained Gilmartin.
In a recent study by the NFIB, 78% believe that retrospective capital gains on assets passed on to beneficiaries after the death of a business owner will wreak havoc on small businesses.
Although Biden has promised protection for family farms, there has been reluctance from industrial groups like the American Farm Bureau Federation.
By abolishing this tax break – known as the “step-up-in-basis” upon death – the federal government would raise $ 113 billion over a decade from 2022, according to the University of Pennsylvania, in conjunction with a higher tax on capital gains Wharton- School.
And the anticipated capital gains proposal would cost $ 33 billion over that period if that top-up is not eliminated, the analysis says.
For some small businesses that oppose the tax proposals, Biden’s plan is only seen as a start – and could get even more noticeable if it doesn’t cover all of the additional federal spending. With fears that the post-pandemic growth spurt will slow down, the likelihood of Washington looking for more revenue is likely to increase.
“Tax increases are always negative, but tax increases when you are trying to recover from a pandemic are really bad advice,” said Keating of SBEC.
Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter: @daniromerotv
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