Business income or personal income
In response to Small businesses and tax cuts and reporting by Daniel Becker, reader Betty, a long time small business owner and not a sole proprietor herself in one of the richer towns of MA with a median income over $180,000 , asked:
… I’ve always been baffled by the Republican complaint that it would be bad for the BUSINESSES of small business owners with incomes over $250,000 to be lumped with the Rich and have their taxes go up, or not go down, if the Bush tax cuts were not extended for the wealthy. What I don’t get is this: Even if the business earns millions, all business expenses are deductible. What’s left that’s taxable (the profit) is the PERSONAL INCOME of the owner or owners, right? So how does a higher tax adversely affect the business? Or are these large small businesses just corporations in disguise?
Dan Becker replied to Betty in two excellent posts from the past:
I posted back in July of 2008 specifically addressing the conflation of income and business taxes as Betty is noting.
Unfortunately, too many business people don’t get it either as I found after having a heated discussion with one of my colleagues. He insisted I must not be incorporated because I did not know what I was talking about.
At the time I posted it, a couple others at AB commented that I was making the issue too complicated and that the average reader did not need to know such details. Here we are 2012 discussing it again. We can not expect to solve our problems is we are going to avoid deeper understanding of the words we use and the concepts those word represent.
I suggest my posting on the 1936 tax tables is another one of those postings that not enough people have read. To many people really have little to no idea just what is being talked about when someone says “income tax” or “marginal rates”.
(Dan C here…The small businesses many people, in my estimation, generally associate the term ‘small business’ are probably ‘companies’ under 50 employees but with a variety of legal and IRS oriented classifications. I may post updated versions of these posts…people tend to approach taxes with more religious fervor than understanding).
(Real) small businesses have limited access to credit, and therefore finance with their own capital.
Betty must be one of the rare small business owners who has no cash flow problems.
It is not about income per se, it is about free cash flow and the ability to reinvest. In that regard the (real) small business owner and the business are one entity.
Looking back at Daniel’s post of 2008, he says that money reinvested in an business is not taxable, but that would only be true if those reinvestments were all for Section 179 items or other charges. If the business used its income to purchase some non-179 assets that then had to be depreciated over a period of time, wouldn’t owner would pay tax on the money? Isn’t this the reason for all sorts of leasing arrangements that would not be reasonable if tax weren’t taken into account?
In generally speaking, as the argument goes for not raising taxes on those of incomes at $250K plus is because it will hurt their business.
That is bunk. The income tax is paid after the business has done all of it’s business thing regardless of how they structure it. If the person has no money left to put into their business because they paid to much in income taxes, then they are either sacrificing the business for their personal fun or they really don’t care and are happy with what they got. Or, maybe they don’t get it.
In the end, blaming the inability to put money back into their business after they have taken out their income into their pockets because of the taxes they have paid on that income is just plain conflation by the “don’t tax me bro” crowd.
Cash flow is a business problem not a tax problem.
One more thing, using tax cuts to make up for lack of income is policy of decline.