In the past few weeks there has been proposals put forth by President Obama to lower the corporate tax rate which at first glance looks great for the small business manufacturer but upon a closer look isn’t as good as it sounds.
The problem is that most of the breaks would only benefit a small number of companies. In the end it will leave many business owners with a higher tax bill. The plan calls for the corporate tax rate to drop from the current 35% to 28% with manufacturers being capped at 25%
The reduced rate however only applies to larger “C” corporations structured like fortune 500 and larger companies that pay taxes on the money they earn. The majority of the small businesses are set up as sole proprietorships, partnerships, LLC’s and S corporations where the earnings from the business are passed through to the owners who report this as income on their 1040 returns and pay the tax. Only 25% of all small businesses are set up as C corporations.
In most cases the small business has a higher tax rate. If the total household income rises above $250,000 the federal tax rate on income rises to 39.6% in 2012. Many business owners are in this group since many are two income households. The proposal makes little sense because it is not a comprehensive one.
The good things to come from this proposal include some real concerns of business owners. It calls for a permanent increase to $1 million in the Section 179 deduction for purchases of equipment such as computers, vehicles and manufacturing machinery. The deduction has fallen to $125,000 in 2012 from $500,000 in 2011. It’s scheduled to drop to $25,000 next year. However, most small businesses are unlikely to spend a million dollars on new equipment in one year.
The proposal also doubles to $10,000 the deduction that an entrepreneur can take for money spent on starting a company. It also allows more companies to use the simpler cash method of accounting.
The only way to gain true reform in the corporate tax structure is to overhaul the entire system with broad reforms and include individual taxes as part of an overall solution. It’s time this country stops giving handouts and breaks to only the biggest and turn their attention to the majority which are the small businesses.