Biden’s Tax Plan will Devastate Small Business
By Jack Meyer – 10/19/2020
The debate over VP Biden’s promise to raise the federal income tax rates for everyone who makes over $400,000 sounds perfectly reasonable to many, if not most Americans.
Unfortunately, most Americans are not familiar with some important aspects of taxation that go to the heart of this proposal.
Those “earning” over $400,000 per year are mostly small business owners. What people don’t realize is that the income of most small businesses is treated by the IRS as the personal income of the business owner. Small businesses typically are structured as a Limited Liability Company (LLC) or a sub-chapter S corporation. In both cases, companies file tax returns. However, the net income of that company must then be reported on the owners’ personal income tax filing as personal income.
What this does not account for is the fact that most small business owners pay themselves last. A business owner of a business that earns $500,000 may never get to spend those dollars personally. For so many businesses, those funds are left in the business to be used for expanding (which generates jobs), buying new equipment (which generates jobs at another company) or to be ready for the investment required to service the next big account that they land. It is not unusual for small business owners to pay themselves reasonable (and sometimes even paltry) salaries in order to keep money in the business to fund growth.
This is the taxpayer Biden is focusing on. The person who is working hard to build the business, but is forced to take money out of the business just to pay the tax bill, as promised by Biden, of 39.6%, which would become the top of the personal income tax rates. Also, Biden promises to add an additional 12.4% social security tax on those earning over $400K per year. This means that the business owner who wants to invest $500,000 in his business for expansion will need to draw out hundreds of thousands of dollars for income taxes and social security taxes. Combined, this means a 52% new taxation on those making over $400,000, compared to 37% now. Even billion-dollar corporations would pay a maximum of 28% under Biden’s plan.
The fact is, the way small business income is treated needs to be addressed by either a Biden or Trump administration. Based upon what has been seen in the past and general philosophies of the parties, a Republican administration is far more likely to address this inequity.
It is important that people not think of those “earning” over $400 thousand per year as fat cats who have money to burn. More likely, they are middle class Americans who are taking home $100,000 to $120,000 per year and are trying to build a business.