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Keeping Tax Rates Low

Keeping tax rates low is important for small businesses because of the many operational challenges they face.  Many small businesses struggle to keep a steady cash flow, which is needed to not only run their business, but also support their families. One in five small businesses has a continuing cash-flow problem, a common challenge among businesses of all sizes. Specifically, after-tax income is an especially important source of capital for small businesses. High tax rates mean less money that small business owners have to reinvest back into their business.

 

 

According to an NFIB’s National Small Business Poll, 75 percent of small businesses are structured as pass-through entities (S corporations, limited liability companies, sole proprietorships or partnerships) that must pay tax on their business income at the individual rate. Most small businesses do not pay the corporate tax. If the 2001 cuts are allowed to expire, the small business sector will see its taxes increase significantly in 2012.

H.R. 4853 - The Middle Class Tax Relief Act of 2010

After months of debate and some last minute political wrangling, Congress passed and the President signed into law the 2010 tax compromise package. This law provides temporary extensions of a number of expiring provisions and will protect small business owners from a tax increase.

Here are the most important provisions that impact small business:

  • All expiring lower rates from 2001 and 2003 are extended for two years.  This means that lower capital gains and dividend rates remain in place. It also means that no small business owner will see their individual taxes go up in 2011. According to an NFIB Small Business Poll, 75 percent of small businesses pay their taxes on their business income at the individual rate.  
     
  • The Estate Tax will not go back to a 55 percent rate with a low $1 million exemption. Instead, small business owners can plan for a two year estate tax of 35 percent and a $5 million per spouse exemption.

  • The Alternative Minimum Tax is patched for two years, so 26 million taxpayers are protected from this tax increase.

  • 100 percent deduction for qualified business investments in 2011. This builds on the generous expensing provisions included in the Small Business Jobs Act that included a $500,000 limit for qualified equipment and up to $250,000 in renovations (a completely new change to the expensing law). Bottom line – just about every small business can write-off the full amount of investments they want to make in 2011. In addition, for 2012 the expensing limit will be $125,000 instead of falling to $25,000.

  • Every worker (including small business owners) in America has a 2 percent cut in their Social Security payroll tax for 2011. For example, a worker making $40,000 will pay $800 less in payroll taxes.

These are all wins for small business. For the last two years, the conventional wisdom in Washington was that some of these taxes were going to increase. The challenge for the last two years was to keep these lower tax rates in place since they were set to expire on December 31, 2010.

While we would have preferred a more permanent solution, NFIB believes this compromise gives all small business owners some much needed certainty over their tax liability for the next two years – an important factor in our economic recovery.