Small Business Taxes: Much Ado About Nothing

All the blather about Obama's small business taxes is sound and fury only, signifying nothing except perhaps how few non-business opinion leaders know what they're talking about when they talk about small business.

Here's the deal, and I say it as somebody who's built my own business from zero to multimillion dollar sales, and 40+ employees, over 20 years -- hardly a neophyte.

Profits, much less taxes on profits, are not a big issue for me, and I suspect in that I'm more like the rule than the exception. As you look at small business, those of you on the outside, please realize that profits are what's left over after we take our sales and subtract our costs and expenses. We don't have a lot of profits. This year, less than ever.

And for the vast majority of us, those expenses include what we pay ourselves. In a normal year, as my business grew up, we never had enough profits to worry much at all about taxes. We paid a lot more taxes on our salaries -- which are a business expense -- than on the business.

So all this trumped up debate on small business owners being mad at Obama because of taxes on business profits above $250,000, for me at least, most of the problem is that people don't understand the term profits. As far as I'm concerned, an increase on the tax rate on profits above $250,000 is a high-class problem; I'd like to have it. Well, maybe not, because when we make that much more than what we spend we like to put it back into the business -- better products, better marketing -- so that we grow.

In almost 30 years of running and growing a business, I've never lost sight of my ranking of what's important, particularly in a self-funded (bootstrapped) business. In order of priority, it's always been:

1. Cash flow. Ideally, cash flow self sufficiency. When you don't have deep pockets, or outside funding, you can't run negative cash flow for very long.
2. Growth. In most small business, particularly in my area of software and high tech, it's either grow or shrink, not stay the same. And growth costs money. Growth shrinks profits.
3. Profits. You do have to make enough to fund growth; but if you use those profits to fund growth, the tax man doesn't call them profits any more. They're expenses, like marketing and product development. And hey, that's taking us full circle. The tax rate isn't the issue.

I can't speak for all of small business -- and none of those other people can either, even though they claim to -- but I will say that what I want from Barack Obama's presidential administration, right now, is avoiding a depression. Fight the big battles. Get the banks lending to small business again normally, get the SBA lending going again, get the major economic indicators right, as soon as you can -- which I know is going to take a while -- and that will make small business healthy. Taxing profits over $250,000 at a higher rate is not a big issue.

Comments

[Jachyra]

This may be true for the author, who in his own words was able to build his company from "zero to multimillion dollar sales, and 40+ employees, over 20 years" (presumably during the biggest economic boom in our history since he said it was over a 20 year period), but as a small business owner who employs only 12 employees and technically made more than $250k in profits last year, my accountant is telling me that I'll probably need to trim down 2 or 3 employees once the tax hike happens, just because its impossible to determine how much of a decline in sales we're going to experience the rest of the year and next, and he is telling me that we need to put as much in reserves as possible just in case the economy gets worse. Most of my other friends who also own businesses are mostly getting similar advice. I can certainly understand why non business owners might think that 5 or 6 percent here or there shouldn't matter all that much, but when you're running a business in an environment like this, 1 percent here, 1 percent there, really starts to add up. Even if only 1 out of every 5 small business owners are in a similar position as I'm in, then that adds up to quite a few jobs.

[Nonpartay]

Sounds like your advisers are listening to the same financial "experts" on the TV as the rest of us. I don't believe it. If you don't hire or have to let go employees, it won't be because of any slightly higher tax rate, it'll be because of other factors. After all, an employee constitutes a tax write-off, right? Hiring one could save you taxes though I have no idea how much. If you have to let people go, it won't be because of taxes, it'll be because of less business because of a struggling economy generally. I'm hoping that the measures the administration has taken to improve the economy will result in more sales and more customers thus giving you the capital you need to keep going. Makes sense to me anyway.

[Tim Berry - Huffpost Blogger]

Jachyra, wait. No offense, but there's a logical problem with what you're saying. Taxes are on profits, what's left over, and by saying you're making more than $250K per year in profits with only 12 employees, wow, that's really profitable. Congratulations! And, if so, then don't cut those 2-3 jobs, save them, and you'll be less profitable and pay less taxes.

If sales are down, as you say, profits will normally be down too, so you're not so worried about taxes. And if profits are high, as you say, then why not spend on keeping your employees, or more marketing, so you invest in your company's future instead of making those profits and paying those taxes.

[janepdavis]

The media has handled this subject so irresponsibly. For all the "financial experts" they have on hand, you would think one of them would have pointed out what Mr. Berry has so clearly explained. The media has gotten to the point where they don't care about the truth. They just want to stir it up - that's how they profit.

The other thing that is burning me up is the falicy that the stock market is tanking because of Obama's policies. No...the stock market is tanking because corporate earnings are in the gutter. Isn't it interesting that today when Citi announced it will have a profitable quarter that the market went up 300 points. Hmmm.

[SeenItBefore]

Thank you , Mr. Berry. Your analysis was spot on... to anyone who runs their own show.

Sadly, the nay sayers are retirees from corporations or government jobs. They know nothing beyond what talking heads tell them.

Most have no idea what it's like to fire someone, or decide NOT to take a job because it's a snake pit. Nor have they spent their nights and weekends miserating what new equipment to buy or maybe more STP will save the delivery van. To save money, we do our basis bookkeeping before calling a CPA.

My spouse and myself run small businesses. We are successful. We put in the hours, long hours. As we have pasted retirement age and still work, we wonder how those younger than us are going to make it, unable to see beyond a big truck, ski boat, big screen tv, new house in the 'burbs, and, multiple vacations to Mexico.

The complaint seems to be misunderstanding numbers. After allowable deductions, my company showed $23,000.00 profit last year. I grossed 3/4 million. My spouse, much smarter than I, and more successful than me, grossed 2.4 million in sales and made $130,000.00 profit. We plowed close to a million dollars BACK into the local community in the form of purchases, wages and taxes.

We are not going to pay more taxes. We do have a wish... that the taxes we DO pay are spent wisely. To date, we see little evidence.

[ADunafraid]

Couldn't agree more. I have been an owner of a small business for about 5 years now and not once have we come close to posting a profit over $25,000. There is a simple reason for that whenever we do well we give ourselves and employees year end bonus to increase our payroll expense and lower our business tax laibility. Everyone is happy with that decision and we get t retain the best and brightest.

[Nonpartay]

THANK YOU!!!! I have been so FED UP when I hear Republicans talking about how Obama's going to tax small businesses. It's such a lie. Great article! And not a moment too soon.

[itolduso]

Thank You! I'd like to also point out that one of the most damaging results of the Republican's so-called 'tax cuts' of the past 8 years has been the loss of revenue to cities & counties which then are force to make up the budget shortfall by raising 'fees', my business license, occupancy permit, fire inspection certificate, ect., ect., have all gone up- added to the increase in driver's license & plate fees, insurance costs, increase in local sales tax, increase in permits ect., I can't afford to even live here much less operate a business here... must be why all the big businesses have moved offshore!

[jessieo]

Thank you thank you thank you. I was so upset during the Joe the Plumber debacle about this. People don't understand that you get taxed on what's left over so the impetus is to spend, spend, spend to avoid taxes. I'd rather have new computers and skid steer for my business than claim a profit so I'll buy those things rather than give a portion of my profit to Uncle Sam.

[KillTheMessenger]

Which in the end boils down to you having a new computer while the road in front of your business is falling apart.

Makes perfect sense.

:-)

[Nonpartay]

Well, the new computer has added sales tax, most likely, and the store where he got it employs folks, most likely, who also pay income tax (as he does on his salary). The people who made the computer also pay taxes on their salaries and earnings. If those employees (and he) are then able to own a house, they pay property tax. And they all pay sales tax on the taxable stuff they buy. Then there's the gas tax and car registration fees they all pay. It's not so simple as people think....

[Tim Berry - Huffpost Blogger]

@KilltheMe­ssenger,bu­t those aren't the real options. Nobody gets to direct the taxes to the infrastructure they want. If you're implying that good citizenship means don't spend on legitimately deductible business growth expenses because that means lower profits and less money for the government, well, good luck with that one.

Even if you had the money to pave the road, that's a public function, to be paid by taxes, and not a choice you have. Furthermore, what's being said here leans towards the government having money to pave the road in front of the business. We're saying tax rates on profits aren't that important, meaning it's okay to raise them if the economic situation requires it; and, by extension, more so if you could actually influence the road in front of you.

[Kevin Wilson]

jessieo posted: “spend, spend, spend to avoid taxes . . .I'll buy . . . things rather than give a portion of my profit to Uncle Sam.”

The idea of buying equipment or inventory just to avoid paying taxes seems short-sighted, even spiteful.

I’m not an an accountant or a tax attorney: I’m a business consultant. I’ve seen very few small businesses that make the kind of money we’re talking about. A nice profit would be 10%. Most successful small businesses make 5% or less. That is, after all direct costs are covered and all overhead expenses like rent and utilities are paid, 5 cents of every dollar remains to reinvest in the business or to be distributed to the owner. So a $250,000 net profit would require generating about $5 million dollars in revenue. That’s pretty sizable.

Now, as to the idea of spending the profits rather than paying the taxes: You’d rather spend a $10,000 profit on equipment that begins to depreciate from day one, and on which you have to pay property tax, and not put a dime in your pocket? I say pay the $1,500 in taxes (15% if you're a C corp) and another 15% to 28% on the remaining $8,500 and take home an extra $6,000 to $7,000. If you’d rather not give anything to Uncle Sam, give me the money. I’ll gladly pay the $3,000 in taxes to take home $7,000!

[katysax]

Thank you. I am also a small business owner. All this talk about how taxing income over $250,000 will hurt small business makes me want to scream. I wish I had the "problem" of being taxed on that income. I employ eight people (used to be thirteen) and in this economy I make zero.

The one thing the government could do that would really help me - and other small business owners - is provide decent healthcare to my employees (but please don't make me pay for it, there is no level at which it is "affordable" for my business).

The Republicans are no friend of small business; friend of big business, yes, but small business no way.

[KillTheMessenger]

"The one thing the government could do that would really help me - and other small business owners - is provide decent healthcare to my employees (but please don't make me pay for it, there is no level at which it is "affordable" for my business)."

I have to disappoint you. Government managed health care systems are all paid for by small businesses, everywhere in the world. If you can't make any money as it is, you couldn't even be in business in Germany.

[Nonpartay]

Excuse me, but small business does not pay for health care any more than anyone else does, maybe less. The costs will be born by taxpayers and by the savings we gain by modernizing the system and getting people into preventive care instead of expensive emergency rooms. Even if they raised my taxes a couple of thousand dollars a year to pay for it, it would be FAR less than what I pay my HMO. I would pay it in a split second, especially knowing that all people would be covered. Do you realize what that would do for the general health and well-being of the nation? And it would be fulfilling two constitutionally mandated functions of government: to "promote the general welfare" and "insure domestic tranquility." Infectious diseases would be nipped in the bud, there would be a monetary incentive to make sure the food was safe and healthy, the list goes on and on. Think about it, please. This would be a VAST improvement!

[txkayrose]

Thanks for a great article !
My family had a small business when I was a kid and your explanation reflects what I remember learning from my dad. I have often wondered, while listening to the talking heads blather on lately, whether I just hadn't understood things correctly as a kid, or if the talking heads were really full as full of it as they sounded.
I will gladly correct the misconceptions of several co-workers and neighbors (who have no experience with small business) next time they start to regurgitate the (mostly) republican nonsense about the new tax structure.
As you said, my dad would have been THRILLED to have to decide whether to re-invest $250k in profits or pay taxes on it!

[Strywever]

Hear, hear! From one small-business owner to another, may I say thanks for sounding the voice of reason! I've been apalled (but not shocked) at the way the GOP's mouthbreathers once again just make stuff up as they continue to demonstrate their belief that their carefully groomed, low-information constituents will simply believe anything they're told.

I suspect the number of small businesses with PROFITS of more than $250K per year is very small. All those mom & pop operations that fill the strip malls and "downtown" blocks in every town? THOSE make up the bulk of small businesses, and it's tough to imagine that many if any of them are making anywhere close to that kind of money.

None of the small business owners that attend my Chamber of Commerce meetings (in a mid-sized town) do, for example.

But, hey -- facts be hanged! Who needs facts when we have conservative misinformation (aka "lies") to rely on?!

[emariejon]

Thank you, Tim Berry. The Republican mouthpieces are counting on the fact that many, many taxpayers don't understand the difference between gross receipts and net profit (after expenses). With the investment tax credits, you can spend thousands on equipment and other assets and deduct these expenses from your gross receipts. Another example of the dumbing-down of our educational standards , too, right?

[JScott]

Too bad folks like this don't speak up more. Whassa matter corporate MSM, it doesn't fit your world view?

One can get tired of the 'chamber of commerce' sturm and drang.

[cap10gil]

Finally, reasonable people are blogging. As a former business owner, I have always made note of how the Republican Party talks about small business owners driving the economy. But the laws that they want to impose or stop always seem to favor big business. They act as if no one is paying attention to the"bait and switch" language.

[Busbydav]

Thanks for the article, I've been screaming this to any republican that would listen since election season and they never seemed to get it.

[trotskylives]

As one who has bootstrapped, what really kills you is the 15% payroll tax and no cheap health insurance.

Between 32K -100K a year in profit, you are at 25-28% fed + 15% payroll + 6% state = 49%income tax, plus you have to pay your own health insurance. Why does the government make it so hard to start your own business in this country? You are paying close to 1/2 your profits you could be reinvesting to taxes.

The issue on the 250k tax increase is if your company was making 500K in profit, the 250K taxed at 5% more would be about 12.5K. It's not that big of deal either way, but I still think the govt could find ways to cut spending in useless areas, like the farm payments.

[Hobbit78]

Meanwhile, there are some 11 million unemployed people who are not helping to share the tax burden and trust fund babies are taxed at, what is it now, 15% on their capital gains of millions? Driving down wages to compete with third world countries doesn't help either.....taxing a $100,000/yr. salary @ 10% would generate the same tax revenue as a $50,000/yr. salary taxed @ 20%.
25 years ago while in college, my wife had 3 part time jobs and she made $9.50/hr. on average. Today, 25 years later, our 16, 18 & 20 year old kids make $7.50, $7.95, & $9.00 respectively, and the once $9,000 car now costs $25,000.......God help my kids!
The tax rates are too high because wages are too low, and the super rich pay little or nothing.
If wages kept pace from the pre-Reagan years, the minimum wage would be $15/hr. and the average wage would be $85,000/yr. and the tax rates would be lower. Thanks, GOP.

[Lilybart]

But BUSINESS needs you to make less than minimum wage......

They always say that people need businesses to thrive, but businesses need thriving people to buy their goods and services, which is what we are seeing now.

[Whizbangsc]

I agree with the author. Increased taxes on profits above $250K is a far off problem. We own a small tavern, approaching 20 years now, that grosses in the neighborhood of $250,000 per year.

We manage to employ 4 to 6 people, and therefore support extended families upwards of 10 to 20 adults and children, in our food and beverage business which operates 18 hours each of six days per week. It's a hard scrabble life

It's a world where the price of a draft beer is $2.50 and has been increased twice in 12 years by 25 cents each time. Our customers notice that quarter.

Our issues are more related to the increase of the cost of goods, beer cost up 50% over the last 5 years, local taxes which inflate the cost of a pint or mixed drink by 8-13% and other costs invisible to the customer. Some times we make a buck, a lot of the time we do not.

An obvious answer is to raise the prices, but our customer base is hurting too. We have taken the approach that what we do is to provide a level of comfort, solace and socialization to a group of regular people who have few reasons to be happy in their daily lives.

Taxes on $250K? Bring it on. We should be so lucky. We'll just keep doing what we do. Serving our customers and supporting our staff. I suppose our profits will come in the afterlife.

[Busbydav]

OMG where is your Tavern because I'm coming! Philly has not seen $2.50 for a draft beer in a long time, we're conditioned to pay $4,$5, $6 for domestics not on special. More for craft beers.

[clarryr]

I was under the impression that either the stimulus plan or the budget included tax breaks for small businesses. Correct?

[trotskylives]

I didnt see anything in the stimulus for people like me. 50% taxes prevents me from expanding my biz, so I end up hiring off shore folks. Is that good from the USA?

The govt , via the wagner act, will overpay for stimulis work. Get rid of this act, you don't need to pay $20/hour for a highway flagwaver - and tax my small biz at 50%.

For those of you who think we don't spend enough money on schools, bridges, etc. I ask you to examine the facts first.

For example, DC spends 26K per student per year. Those same students didn't have textbooks at the beginning of this year! A small voucher program that costs 6K per year is now being killed. Is more money really the solution? I imagine it is like this in many other cities, just pure waste of taxpayer money.

I don't mind paying taxes, all I ask for is that they are efficiently spent, like if I was spending my own money. I don't see this attitude in our government at all!