NEW YORK (AP) — Last week, President Barack Obama released a proposal to lower the federal corporate tax rate — a move that on its face — would seem to be good news for small businesses. But the president’s pitch isn’t getting rave reviews.
Advocates for small business say the plan would benefit a relatively low number of small companies and leave many business owners with higher tax bills.
The proposal, released Feb. 22, calls for the top corporate tax rate to fall from its current 35 percent to 28 percent. Manufacturers would pay no more than 25 percent.
But Obama’s proposal only affects companies known as C corporations, which are structured like General Motors Co., Apple Inc. and other large companies. These companies pay taxes on the money they earn.
Most small companies are sole proprietorships, partnerships and businesses known as limited liability companies or S corporations. In these companies, earnings from the business are “passed along” to the owners, who report the income on their 1040 tax forms and the owners pay the tax. Just 25 percent of small businesses are set up as C corporations.
In fact, most small businesses have a substantially higher tax rate. Households with incomes above $250,000 a year face a federal tax rate of up to 39.6 percent next year. Many small business owners are likely to fall into that group — especially if they’re in a two-income household, which means the taxes on their businesses in effect would be 39.6 percent, far above the proposed 28 percent tax on corporations.
“If you’re going to do tax reform, you have to do it comprehensively,” said Chris Walters, the senior manager for legislative affairs for the National Federation of Independent Business.
It may not matter. It’s unlikely that the Obama proposal will become law anytime soon. A big tax law change probably won’t make it through Congress in an election year.
But the proposal does address some concerns of small businesses. It calls for a permanent increase to $1 million in what’s called the Section 179 deduction for purchases of equipment like 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.
Richard Zuckerman, a certified public accountant in New York, noted that most small businesses are unlikely to spend $1 million on equipment in one year. Zuckerman, who runs his practice as a limited liability company, or LLC, said of most small businesses, “they’re not going to utilize the benefit of the lower tax rate” on corporations.
The proposal would also double to $10,000 the deduction that an entrepreneur can take for money spent on starting a company. It also allows more companies to use a simpler method of accounting called the cash method.
The National Small Business Association called those parts of the proposal “positive.” But the group’s president, Todd McCracken, said in a statement, “the only way to ensure fairness, transparency and eased complexity of the U.S. tax code is broad reform. And that must also include individual income taxes.”
The negative response of the groups to the proposal carried a warning about the impact it could have on the economy: The higher tax rates that many owners face would limit their ability to create jobs and help the economic recovery.
“It’s not going to do magic and it’s not going to cut unemployment in half,” said Paul Bieganski, owner of Packet Power, a Minneapolis-based computer hardware and software manufacturer, which is set up as an LLC. But, he said, “anything that levels the playing field to some extent is very welcome.”
Joyce Rosenberg can be reached at —http://twitter.com/JoyceMRosenberg