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

[JimBozo]

Nice to hear something on the subject which makes sense.

[cylindar]

I agree. I have bootstrapped also and do not find it a problem.

[Overtone]

Thanks for an important article!

SMALL BUSINESS IS THE KEY TO JOBS!

Up to 6 million jobs and 4 million small businesses can be created by A Human Investment Tax Credit Program.

This was missing from the stimulus package.

One component, a jobs tax credit, became law for one year and generated more jobs in less time than any legislation in our history.

Two versions of the 2009 Report can be downloaded free at: aesopinstitute.org
The full Report contains a post Keynesian economic analysis.
The short version includes only what can be done, as well as an outline for Congress.

The House Ways and Means Committee needs to debate and launch this urgently needed Program without delay.

[Lilybart]

HEALTH CARE REFORM. Affordable healthcare NOT from your employer will save this country and make it possible to start a business.

If I didnt' need family health coverage I would NOT be in this job. I would start a business but I can't since hubby is a writer and buying our own insurance is $24,000 after-tax dollars a year.

[BannedFromCommenting]

How can health insurance be $2000 a month? Even Cobra when you lose your job is cheaper...
And I am covering my child too..

[clarryr]

Nice article - I've wondered about the "much ado about nothing". Two of your statements seem to contradict each other:

"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. "

"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. "

My understanding is that re-investment of profit is an expense and isn't taxed at the increased rate. Is that correct?

[jackybird]

I've noticed exactly that confusion in the media as well. A plumber (no joking, there are real plumbers out there) I know was worried because he was under the mistaken impression that receipts, not profits would be taxed.

What clarryr notes as a contradiction isn't. If you take some of the money you earn from selling your products and spend it on research to improve that product, the money you spent is considered an expense and is not considered part of your profits and therefore not taxed.

If a small business is holding onto more than $250,000 dollars worth of profits, that means that it is not being reinvested in the business, which is why it is a problem you wouldn't really want to have. If you're taking in that much money, you should really be putting it back into the business. Did that make sense? I'm trying to avoid being wordy.

Tim Berry's list of priorities is absolutely correct.

Does anyone know if there's an organization of progressive or liberal small business owners out there? I agree that the people who claim to speak for small business don't speak for everyone, however it seems to me that liberals can often be cavalier about business owners' needs.

[clarryr]

Thanks for the clarification. So in this sense: if you re-invest all profits above 250k you won't pay additional taxes; this reinvestment will grow your company and may enable you to hire more people. Therefore, the tax increase on profits above $250k is an incentive on reinvestment which will further stimulate the economy. Sweet, a tax increase that stimulates the economy.

[Dystopic]

profits reinvested in the business are no longer profits.

[tjwisconsin]

It really isn't that simple. Like Tim says he cannot speak for all small business. Some businesses require more investment in fixed assets which have to be deprecitated over the life of the asset (meaning you cannot write off your investment as an expense) while other business require more investment in personnel - costs you can writeoff immediately. When looking at asset intense businesses you have to consider depreciation tables and inventory valuation methods. The point is you can make 250k and still have a negative cash flow because the profits may have been inventory writeups (purely paper gains sitting on your shelf until the product sells) and your reinvestment may have been in fixed assets rather than expensable resources. Depending on the type of asset, the depreciation works differently - you may not be able to write off much of what you spent in the first. That is why depreciation schedules are more important than tax schedules when looking at stimulating the economy.